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."
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.