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Linda Nichols is a Menlo Park massage therapist who saw only 20% of her clients return when San Mateo County allowed personal care services to reopen last June, before she was promptly shut down again due to a spike in COVID-19 cases. The landlord waived a month’s rent, but the relief meant little as the costs stacked up over the year.
By the end of this March, her savings depleted, she’ll be leaving the Bay Area to stay with her family in Texas.
Jon Goldman is a co-president of Premier Properties management company, which manages around 100 properties in Palo Alto and others in Redwood City and Menlo Park. Since March, he has overseen all kinds of arrangements between tenants and property owners: restructured leases, companies practically using their Class A office space as a storage room, or tenants idling along without paying any rent.
It’s the worst crisis for commercial real estate in Palo Alto since the dot-com bust and the 2008 recession, he said. Availability rate, or the amount of space that can be advertised, in downtown Palo Alto alone is at an all-time high — around 15%, according to Goldman. But, he said, he’s almost certain the true rate is even higher.
This is an 11-months-old disaster that has yet to see a clear end date or an elegant solution. Commercial tenants, many small business owners, are looking for rent relief on spaces they aren’t using to full capacity, to avoid further cutbacks on top of other cutbacks. Landlords and property managers have little to no choice but to work with their tenants to avoid souring what can already be complicated relationships and risking vacancies that will be difficult to fill in the future.
“Everybody’s been working together because it’s obvious there’s nothing you can do about this,” Goldman said.
While state and local ordinances have mostly leaned toward the side of the commercial tenant by effectively halting evictions, regulations have done little to alleviate fears of legal repercussions against the smaller occupants struggling to find relief from their landlords or, on the more extreme side, to prevent business operators like Nichols from shutting down permanently and making an involuntary Bay Area exit.
Sally Hayman, a longtime psychotherapist in Palo Alto, for months has sought a reduction in the rent on her California Avenue suite but with little results. She and three of her colleagues, who are also licensed clinical social workers and work out of the same office, are currently paying for a space they haven’t stepped foot in since March when mental health services started to go virtual.
“Everyone I know is working remotely,” Hayman said. “We’re liable not only for ourselves and our health, but we’re also liable for our clients and their health.”
It’s not just health concerns stemming from their age — they’re all older than 65 — but from the layout of the office suite, which Hayman said includes a shared waiting room that can’t hold multiple clients at 6-feet distance, rooms with windows that can’t open while they meet with clients, and a rattling HVAC system that none of the tenants are sure has been improved or looked at by the property manager.
Hayman also is bringing in less income now. She lost six clients, is booking fewer sessions for her remaining patients, and gave a few people discount rates. Still, she manages to pay rent on time, as she has done for the past 20 years.
At one point, Hayman did consider what the consequences would be if she refused to pay the rent. A few retailers like Gap and luxury brands that can afford to be litigious have stopped paying rent, tried suing to break from their leases, and have even been countersued by their landlords. But Hayman is not a big retail operation, and she’s unsure whether the stipulations in her lease are too strong for her to just default on rent. She says she can’t afford to be sued.
She’s asked the property managers at Alhouse Deaton, which received a $450,000 PPP loan, for a 15% discount. The most the property management company offered was to reduce rent by half for June and July, 2020, through a deferred payment plan in which the tenants could repay the remainder over a three-month period starting in October.
After many fruitless email exchanges, Hayman is now trying to buy herself out of the lease that ends this year in July by offering five months rent in advance. Alhouse Deaton, which did not respond to multiple requests for comment for this article, declined.
“It’s been upsetting because we feel like we’ve been really great tenants for a very long period of time,” Hayman said. “To make a request that felt genuine and authentic and had good reasoning behind it and just be shut down — we’re very upset about it.”
Some small business owners and tenants report more better experiences with landlords and property managers, or at least situations where they have been more sympathetic to their circumstances.
Nichols, who pays $1,200 a month for her office on Oak Grove Avenue in Menlo Park, said she believed her landlord handled the situation as fairly as possible — at least to her immediate knowledge.
A few generous clients have either continued to pay Nichols as if they were still receiving her services or made donations, but the lifelong Bay Area resident still had more expenses than income.
“My savings are gone,” she said.
Unlike Hayman, Nichols was given an early lease termination, originally set to end in July. She’s currently in the middle of drafting goodbye letters to her remaining clients. If she plans to continue her massage therapy business in Texas, where she is relocating, Nichols estimates that she won’t be getting back to the same number of clients until the end of this year.
‘This crisis has just begun’
In the fourth quarter of 2020, eight leases by a handful of Silicon Valley corporations like Alphabet Inc. in Mountain View, Facebook in Menlo Park and Amazon, which has a lease in East Palo Alto, were responsible for what Colliers International, a real estate service and investment management company, characterized as a “signaling (of) confidence in Silicon Valley’s future.” Each lease entailed over 100,000 square feet each, the report stated.
But looking into Silicon Valley’s cities and further into their respective neighborhoods can paint a wholly different picture, one where once prime locations like downtown Palo Alto and Menlo Park have become dead zones for commercial real estate brokers as leasing deals dried up.
“This crisis has just begun,” said Goldman of Premier Property, which specializes in property management in downtown Palo Alto.
A city like Palo Alto won’t transform into the “Dust Bowl,” according to Goldman, but because employees and sometimes entire companies have moved out of their offices, the economic tolls of COVID-19 will be much worse for commercial real estate than the prior crises.
“You see, 2009 was a bad recession, but it really recovered very quickly here, and people wanted to get back to work,” Goldman recalled. “And a lot of shorter term leases came out of that. This is different because people can’t leave the house, they’re afraid to leave their house, and their kids are not in school.”
Even when employees and companies are willing to come back to their offices, Goldman feels Palo Alto in particular will have delays filling in the leases, the consequence of a market impacted by a “micromanaging” City Council and increasing vacancy rates prepandemic. (Office vacancy rate was 5.2% in the quarter of 2018, according to a report by the San Francisco Business Times, and increased to 7.2% the following year.)
In the meantime, Goldman said his firm has emphasized working with their tenants, trying to renegotiate leases based on their unique circumstances, whether that be restructuring a lease that charges rent based on a percentage of sales or providing a business looking to extend their lease with a good rate.
What Goldman emphasized Premier Properties won’t do is having a landlord threaten a tenant to pay rent or be taken to court or collections.
“We don’t do that,” Goldman said. “Especially in COVID.”
John McNellis, founder of McNellis Partners, which maintains a portfolio of neighborhood shopping centers, supermarkets and drugstores, echoes the sentiment and believes that’s just good business sense.
“You don’t have to be a Mother Teresa or Gandhi, as a retail or office building owner, to be cutting rents or to be giving forgiveness because the demand is way down,” he said.
In March, McNellis Partners was among the first prominent local property managers to call on other commercial property owners to support “mom and pop tenants” during the lockdown and, by way of example, announced it would waive rent for the month of April. In a previous interview with the Weekly, he called it “the right thing to do.”
But McNellis later admitted he held an overly optimistic projection of the pandemic’s timeline, in which the world “will have substantially returned to normalcy by May 1st, even if it takes months to fully recover.”
“I was totally wrong on that,” McNellis said in a recent interview. “Now, 2021 is starting to look like 2020’s fraternal twin — a little bit smaller, not identical, but it’s not coming out so great.”
Unlike in downtown Palo Alto, McNellis has seen 75% of his tenants thrive during the pandemic since his firm mostly focuses on outdoor shopping centers and grocery stores. But other sectors of retail — in particular personal care services such as hair salons and massage parlors — have suffered since the beginning of the pandemic and continue to suffer today, he said.
According to McNellis, one tenant who operates a massage service hasn’t paid rent since March and was given an early break from their lease by paying “10 cents on the dollar.”
‘You don’t have to be a Mother Teresa or Gandhi, as a retail or office building owner, to be cutting rents or to be giving forgiveness because the demand is way down.’
John McNellis, founder, McNellis Partners
But it’s not always the case that a dying business is dependent on the mercy of a towering landlord with all the “financial muscle,” as he puts it. During the pandemic, some “multibillion dollar” tenants, whom McNellis chose not to name, have leveraged their positions as companies with plenty of money and hundreds of locations and threatened to move out unless they receive a 20% rent reduction.
“In a crisis like this, people’s, unfortunately for better or worse, characters come out,” he said. “We have people like the little massage center guys who are truly destitute. … And we also have people who try to take advantage of this.”
State and local eviction moratoriums have given landlords little recourse to enforce rent, McNellis said. But he isn’t expecting anyone to cry about him or his firm.
“Nobody in the world feels sorry for landlords,” he laughed. “It’s properly viewed as kind of comical, and it’s the cost of being a landlord I guess.”
Find comprehensive coverage on the Midpeninsula’s response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.
This is also a symptom of these towns not building high-density housing (i.e. customers) within and adjacent to retail areas. Our downtowns will continue to decline and struggle, pandemic or not, without an increase in perment customer base. The data is all there and those office workers we used to depend on may never come back. BOTTOM LINE – build housing and lots of it if you want your local retail to survive. Otherwise, kiss it goodbye.
How about turning the vacant office buildings into housing? The complexes are already there and this would negate the need for further land development.
No different than converting old factories into lofts and studios.
The solution is already within the grasps of the constituency.
The problem is that no one in PA town is putting on their thinking caps.
This area has long held an aversion to tall cluster buildings.
If you want Caltrain to work AND you want housing AND you want to ease traffic headaches AND you want to draw workers to certain areas AND keep them out of other areas…
…THEN why not build tall(ish) building office clusters near CALTRAIN?
I’m not saying that these should be built in Palo Alto (not at all). Rather, the region should take upon itself a plan to attract workers to office space and away from housing or residential roads.
In most cities and dense metropolitan areas, offices are primarily located in downtown tall buildings and along highways. This has the added benefit of keeping commuters from meandering inside of residential areas.
Imagine if cities zoned tall office buildings to such areas (near Caltrain). It would make sense to build up — because every “up” is keeping people “in.” More commuters could take advantage of Caltrain — without feeling a need to bring a bike or park.
I did a search for information about the relationship between population density and retail space, and found a good study by Cushman & Wakefield here: https://www.cushmanwakefield.com/en/united-states/insights/us-articles/amer-retail-density-conclusion
What this tells us is that as population density increases two things happen: (1) The total amount of retail space increases. (2) The amount of retail space per capita (and per household) *decreases*.
So if our goal is to restore the sort of retail environment that we used to enjoy, simply increasing population density isn’t going to do that. It would create a different, more crowded and competitive, environment. This strikes me as good news for commercial property owners, but at best mixed news for residents and retailers.
There are other factors that would have to be addressed to preserve retail as we’ve known it — for example, rents that are too high to support certain kinds of retail; competition from online sellers; property owner preferences for higher-margin tenants (particularly offices); etc. Increasing population density doesn’t address those.
Increasing population density comes with downsides as well, including increased traffic congestion, more pressure on water supply, less green space, and so on. I don’t think increasing the total amount of retail space, while decreasing the amount available per resident, is a compelling reason for taking on those other problems.
@Nayeli: You can find a good explanation of the development pattern for Silicon Valley in Margaret O’Mara’s book “Cities of Knowledge”. The short answer to your question is that offices here were spread out deliberately, in part because knowledge workers found that more attractive than high-density environments. Some studies as late as the 1980s concluded that multiple floors reduced communication!
Some Palo Altans have a way of over-intellectualizing the problems confronting them.
Just say NO to further development or continue developing.
It’s as simple as that.
Stop confusing me, @Allen Akin. Your facts are too complicated for my Progressive Values.
With commercial tenants decreasing, Palo Alto needs to convert exist commercial zoning to residential just to support the reduced amount of retail..
There is no way all of the existing retail zoning will again be viable, the troglodytes on the City Council not withstanding. It is interesting ypthat Goldman accuses the CC of micromanaging. How could anyone ever get that impression?
Businesses aren’t “suffering” because of the pandemic; the government has prevented businesses from operating during the pandemic. And for that, the government needs to compensate them. And no, that’s not socialism, it’s paying damages for the government’s actions.
This discussion have morphed from the Covid-related stress on small businesses to a worthwhile, but longer-term topic of housing density.
I would like to hear more about Alhouse Deaton, which received a $450,000 PPP loan, but hasn’t given any leeway to their suffering tenants. They need to speak up. If our PPP taxpayers dollars are going to corporations that aren’t the ones suffering, rather the ones actually suffering, then we have a fraud and greed problem.
Please investigate Alhouse Deaton and report on their actions and what they are doing with the $450,000 we are paying them.
@TimR,
In the 1918 flu epidemic, places with the most strict measures recovered fastest economically
https://news.mit.edu/2020/pandemic-health-response-economic-recovery-0401
There’s evidence this is so now, too, e.g. places like South Korea, which at ~ 50 million people has had only ~ 1,500 deaths, even though they were hit earlier and we had more time to respond (and they tried to help us).
So, if we’d responded as they did, with good leadership and mature population response to a crisis, the equivalent number of deaths here for our population would be ~ 10 or 11 thousand. Total. Instead it’s been more people than died in WWII, ~ 481,000 to date. That’s almost 50 times the number of deaths per capita than S Korea. To the economic point, because they responded with a competent national response, they had next to no recession.
Geez, we hear way too much bellyaching about “nanny state” yada yada from people who want to act like toddlers with respect to personal responsibility and competent governance. It would be funny except the rest of us have to live with the deadly/horrible economic consequences over & over while people who supposedly care ideologically about personal responsibility just lie to themselves and us, and blame others.
Competent governance matters. The government is us in this country, and those who serve have a hard job, overlaid with a whole dangerous crazy element now that supposedly loves the Constitution but hates the government it establishes.
NYT recently published an article about the economic research looking at how the economy does under Democratic & Republican presidents, and found it does so much better under Democrats for the last 100 years, we’d all be making twice as much now if we hadn’t had Republicans (interesting, since they never win now with majorities or even the most votes). The article pointed out the probable reason is that Democrats tend to be more pragmatic and Republicans ideological. Same with Covid.
LEGALLY I believe an “Act of God” (coronavirus pandemic) negates an ongoing or term lease contract in place.
Consequences should be minimal for these lease tenants. Suppose a fire wiped out all these buildings? “Act of God”
Tenants don’t pay rent, Government officials would not allow them to open business in a burnt-out shell building.
How is Prop 19 affecting the commercial building owners? Have their tax basis’ been reassessed?
Courts are limiting & mostly aren’t even taking these cases. Criminals with life sentences are being freed-when they never otherwise would have seen the light of day again. No bail system for criminals, regardless of multiple offenses.
Everyone has the same thing in common: free choice.
Why aren’t these small businesses uniting? Investigate if your Commercial landlord took out a government no-payback loan. Get smart stop playing the PC (politically correct) game, its only valid when there are many flourishing wealthy businesses and the community can afford to play that game.
Citizen,
“So, if we’d responded as they [South Korea] did…”
Yes, if wishes were horses, beggars would ride.
But we didn’t respond like they did, did we? Making economic policy now on an imagined, ideal past that never happened is pretty insane. Let’s stick to the facts, shall we? And the facts are that, unlike South Korea, US state and local governments forced businesses to close against their will, robbing them of income. And for that, such businesses need to be made whole.
During the last year, I give society high marks on handling the situation. My major complaint would be the lack of discipline from our elected leaders. Government officials rarely answer questions-they dictated. The community has worked together and we will get through the situation. The economy will survive, but society needs to understand working together can solve many problems. We all know some landlords are good, others are poor. No amount of legislation is going to improve some landlords. I’ve owned property before and learned most renters are good, some are bad. I’ve learned to deal with them without government interference.
Thanks to Government shutting down entire economy.
These landlords are not willing to lower rents. They are willing to kick out tenants when rents go up, and then ask for relief or rezoning when rents should be coming down. Do not convert to medical or other uses. We’ve lost so much diversity in Palo Alto because of high rents. $2 square foot could transform our community vs. $4-$5. Let’s have rents come down and allow more community benefit uses in retail spaces. It’s disheartening to see you choose Goldman as someone to profile. He kicked a beloved non-profit out of their space on Cal Ave because he didn’t like strollers out front and wanted a tech company (he got it).
I’ve been on sabbatical leave (that’s a joke) so I haven’t chimed in for a while but this discussion rudely awakened me from my slumber.
My thinking from 5-6 years ago, when so much was done to try to save retail in PA, hasn’t changed…much. Literally hundreds, maybe thousands, of hours were spent by city staff and CC on how to deal with the problem. Reserving/limiting street level to retail in all the developers’ grand multi-use plans sounded like a good idea for many. Then sprinkle in a few small apartments and a whole lot of office space for the high flying, well funded, and able to pay renters. A developer’s dream come true. Oh, on top of that, if no retailers came forward to rent the allocated space, after a period of time that space could be converted into office space.
What could go wrong? Well, to all those who spent so much time studying the problem…you should have just called me. lol! Big box stores and online purchasing had already been well established as methods of buying without going to your well remembered and loved, but lost forever, mom and pop, and family owned stores in town.
This latest online discussion seems to be a debate about what effect housing density, more people living in PA, will have on retail business.
I’ll go with Allen Akin’s take on it. I’m not a Mensa candidate but I am smart enough to understand what he says…I think! But thanks, “citizen” for your history lesson on the pandemic and how other countries handled it. But we’re “here” and the time is “now” so let’s deal with it in our country in the “here and now”.