Adaptation Of Industrial Actual Property In A Submit-pandemic World – Actual Property and Building

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Since the outset of the COVID-19

pandemic, various aspects of our lives have, for better or for

worse, changed. Some of these changes had already been occurring at

a slower pace pre-pandemic, but are now rapidly accelerating and

becoming the norm in a post-pandemic world. These changes to

lifestyle and work habits affect not only the work force, but also

the utilization of commercial properties across all sectors. Some

sectors – notably hospitality, office and retail – are

among those hit hardest by these forced changes. The question now

becomes: how do developers, landlords, managers, lenders, tenants

and consumers maximize existing and future real estate projects in

a post-pandemic world?

Market Trends.

In many respects, the COVID-19

pandemic expedited existing trends relating to online retail and

telecommuting. Pre-pandemic, online retailers such as Amazon were

already experiencing rapid growth. Unsurprisingly, with many

in-person retail outfits forced to close during the first months of

the pandemic, online retail services exploded further in 2020,

expediting the closures of many in-person retail stores. With

respect to office leasing, many companies already permitted limited

work from home options. However, the widespread pandemic

“shelter in place” rules adopted by many states and

municipalities forced a significant change whereby nearly all

companies were required to permit remote working. Consequently,

members of the workforce who once believed that consistently

working from home led to inefficiencies and an inability to unplug

from business related needs were forced to adapt for the better

part of 2020. In many cases, companies even found that workers

could be as (or almost as) productive as they were when physically

working in the office. These forced adaptations led many executives

and leaders, particularly in white collar industries, to rethink

their current space footprint and question the long term viability

of physical offices. If even a portion of their employees could be

as productive working remotely as in the office, why not take the

opportunity to reduce mortgage, rent and/or operating expenses,

which often constitute some of the biggest line items in a

company’s budget? As a result of this shift, office

availability in New York City hit 16.1 percent in the first quarter

of 2021, the highest number on record, according to Colliers

International’s latest quarterly report. With this backdrop in

mind, we are now left to ponder how best to utilize spaces that

will likely be subject to a limited percentage of workers being

permitted to work in-person at one time and flex scheduling.

Similar to the office and retail sectors, the hotel and

restaurant industries took a beating as a result of the pandemic.

In fact, no industry was hit harder during the pandemic than the

hospitality sector. New York City, for example, saw more than

42,000 hotel rooms (representing about one third of the hotel rooms

available in the city) wiped out, with nearly 200 hotels closing

permanently, to say nothing of the many restaurants that were

forced to close up shop. While trends regarding online retail and

telecommuting have been on developer radars for quite some time,

the shock to the hospitality sector brought about by the pandemic

was unexpected. Most in the industry suspect that it will take

several years (even into 2024) for the hospitality sector to fully

recover. In order to ride out the expected long recovery, many

hotels are now seeking short and long term options to maximize


Third Space and Suburban Revitalization.

These industry woes have forced tenants, landlords, property

managers and lenders to pivot temporarily or even, in some cases,

permanently from these ailing sectors. While traditional retail and

office buildings may struggle to adapt, one area ripe for

adaptation in the post-pandemic world is the concept of what is

often called the “third space”. In its most general

terms, the third space is space outside of the home and office

where people can work but also collaborate and socialize with

others. The third space concept is not new. In fact, many hotel

operators had, prior to the pandemic, invested money, time and

design into flexible spaces in their buildings to maximize

utilization of their common areas. That said, the flexibility that

employers are now willing to give to their employees makes this

third space concept even more attractive for hotel operators and

guests alike. With telecommuting becoming more of the norm rather

than the exception, workers may be able to parlay working from home

into longer vacation stays at hotels in desirable locations.

Workers who were once hesitant to take longer vacations can now

work remotely part time utilizing hotel facilities, while also

being able to enjoy time away with their families.

On a similar note, as members of the work force spend less time

in office buildings and more time working from home, suburban areas

and related businesses appear poised to benefit. Suburban

restaurants, bars and hotels may very well serve as a replacement

for people looking to scratch that social itch. A key factor to

this suburban revitalization is the explosion of the residential

real estate market in suburban areas since the onset of the

pandemic. Workers are fleeing tighter quarters in more expensive,

densely populated areas and seeking larger homes with home offices

and other amenities (e.g., pools) in the suburbs. To that end, we

suspect that suburban areas located outside of, but still

relatively close to, major city hubs will be the subject of

increased investment and development.

Practical and Legal Challenges.

From a practical perspective, it is clear that in a

post-pandemic world, preserving the flexibility for other permitted

uses of office buildings is critical. It should be noted, however,

that there are a myriad legal issues that landowners, developers,

tenants and lenders must navigate to achieve such flexibility. In

the commercial leasing context it is important to first look at

one’s lease. For tenants, negotiating commercial leases with

broad permitted use provisions is important. Often, landlords

attempt to narrow the tenant’s permitted use for a variety of

reasons, whether it be for zoning purposes (more on that below) or,

in the retail setting, preserving a good tenant mix and navigating

exclusive use clauses granted to certain attractive tenants. A

savvy tenant will try to expand permitted uses during lease

negotiations. Similarly, landlords should understand that, in many

respects post-pandemic, flexibility is beneficial from their

perspective as well.

Another major hurdle to seeking flexibility for existing and

future projects includes working within the constructs of existing

zoning laws, which limit property utilization and adaptation.

Throughout the United States and particularly in the northeast,

local municipalities codified various restrictions as to size and

use of certain parcels of land. These restrictions, while well

intentioned, restrict existing landowners and future developers

from quickly adjusting to market trends. While there is some reason

to remain optimistic that zoning authorities acknowledge the issue

at hand, rezoning has typically been a slow development process

requiring, among other things, public hearings. For example, when

seeking to modify existing uses or developing projects, one must

confirm whether such modifications are permitted “as of

right”. If not, a variance or special permit would likely be

required, and approvals must be sought which may further require

studies, public hearings and various other governmental signoffs.

These zoning challenges not only impact construction budgets, but

may also cause long term construction delays and threaten project

milestone dates. It is consequently important for all parties

involved to take serious note of the zoning landscape before taking

any meaningful steps towards the repurposing of existing

developments or the commencement of new development projects.

Parties may also run into issues from a financing perspective,

whether they are operating with an existing lender or seeking new

financing. Lenders often have various financial benchmarks and

covenants regarding the operation of the subject property in order

to ensure appropriate cash flows to adequately service the debt.

Converting existing commercial property into a different use

entirely (for example, converting office space into hospitality)

can run afoul of these types of covenants. Seeking an existing

lender’s cooperation in these types of projects is therefore

vital to the success of the property. When seeking new financing, a

prospective lender will typically want some level of certainty as

to the future use of the property as well as an idea as to the

proposed tenant mix. As a result, future flexibility regarding a

commercial property’s use is likely to be limited unless the

appropriate changes can be negotiated in the loan documentation.

Accordingly, in either scenario it saves borrowers a lot of time

and money if these issues are broached up front with a prospective


From a non-legal perspective, assuming all other hurdles have

been cleared (or at least taken into account), parties should also

consider whether undertaking such drastic overhauls to existing

properties makes financial sense. These concerns include

potentially costly and time intensive construction and renovation

to existing structures to keep up with market trends. While new

developments in underdeveloped portions of the U.S. will likely

seek (and be granted) as much flexibility when it comes to building

use and composition, existing properties in heavily restricted

areas (e.g., New York City, San Francisco) will have a tougher and

more expensive situation to address.


As mentioned, the key to maximizing existing and current real

estate projects is increased flexibility as to the use and services

provided by each respective property and, most notably, to take

advantage of this emerging demand for so-called third space.

Failure by local and state governments to quickly adapt to and

revise applicable zoning laws will cause significant and perhaps

permanent damage to these properties (and, by extension, the

municipality and state governments themselves, which rely on real

estate as a tax revenue generator). Similarly, lenders will also

need to provide some degree of flexibility to existing and new

borrowers to give their borrowers a chance at maximizing revenues.

When navigating these challenges it is imperative for all

stakeholders to have knowledgeable and experienced counsel.

Withers Bergman LLP is an international

law firm with substantial experience with diverse leasing from

anchor tenancies in shopping centers to large office leases, luxury

brand single city retail leases and multiple city retail rollout

programs, residential portfolios as well as diverse lending and

development matters. For additional guidance on these matters and

other COVID-19 related items, please

reach out to our New York Commercial Real Estate Team to develop a

legal strategy to plan for near- and long-term solutions tailored

to achieve your specific goals.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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