Alazayem had been open just nine days before Gov. Jay Inslee ordered restaurants to shutter to control the spread of the novel coronavirus.
Baneen Mohammed, owner of the Mediterranean restaurant in Rainier Valley, wasn’t able to cover April’s $7,500 rent with Alazayem’s earnings to that point, he said. He and his family had sunk nearly $30,000 into the establishment.
May’s rent? Forget about it, he said. Mohammed applied for a Small Business Administration loan in mid-April, but isn’t sure he’ll receive anything.
“March was supposed to be the grand opening month,” he said. “A really good month.”
Instead, Mohammed has debt he doesn’t know how he’ll be able to pay. His landlord, worried about losing the building if he doesn’t make mortgage payments, has insisted rent be paid.
Mohammed is not alone. Commercial real estate has been shaken by an uncertain economic future. Corporate giants and mom-and-pop businesses alike have been unable or unwilling to pay their rent for April. For many, prospects remain precarious as May begins.
Signs of the turmoil abound.
More than 17% of Seattle-area commercial property sales scheduled to close in April were called off, according to the Downtown Seattle Association.
Lynnwood-based skate-apparel retailer Zumiez announced April 2 that it would suspend rent payments for its 718 stores while negotiating rent relief; the company declined to say how those negotiations are going. Starbucks said Tuesday it’s in talks with landlords to reduce its bills.
Google has backed out of negotiations for a lease at the new Dexter Yard project in South Lake Union, Bloomberg reported, as tech giants rethink their space needs.
“The economic impact of the pandemic is totally unknown to all of us,” said Chris Kagi, a senior commercial real-estate broker for Savills in Seattle. “We’ve never seen or been in anything like this before.”
A chain effect
Landlord Glenn MacDonald has worked out different rent deals for his three restaurant tenants.
He waived April and May rent for new eatery Surrell on Madison, which had been scheduled to open March 19, and cut rent 50% for the rest of the year. For big local dining names Monsoon and Zeeks Pizza, the terms are more rigorous.
“I figure they should have the reserves to withstand this better,” MacDonald said.
There’s no standard for negotiating rent during a global pandemic, said attorney Sandip Soli, a partner at Real Property Law Group whose clients include landlords and businesses. Landlords have varying appetites and abilities to negotiate deferrals or reductions. While some — including Amazon — have waived rent for their tenants, that’s uncommon.
“Landlords are looking for a reasonable solution they can implement so there’s not a domino effect … in terms of too many tenants asking for too much abatement,” he said. “They don’t want to lose their shirts too.”
As tenants fail to make rent, landlords have struggled to meet obligations to lenders.
Nationwide, landlords with properties in sectors like retail and dining that have been hit hardest by stay-at-home orders collected as little as 15% of April rent, Bloomberg reported, citing an estimate from commercial brokerage Marcus & Millichap.
Major retailers, including Urban Outfitters, Calvin Klein, Petco, Staples, H&M and Dick’s Sporting Goods, have withheld April rent. As a result, the percentage of retail landlords who missed their mortgage payment in April rose to 10.6% from 1.7% in March, according to property analytics firm Trepp.
At Al Azayem, a similar situation is playing out in microcosm.
Mohammed’s landlord, Hieu Tran, purchased the future home of Al Azayem in 2003, for nearly $2 million in a seller-financed transaction.
Tran was scheduled to own the building free and clear this spring but hasn’t made recent payments. Most of his tenants haven’t paid rent because of the coronavirus pandemic, he said.
Eugene Tom’s father, who died in 2018, sold Tran the building and financed the deal. Tom, a former motorcycle dealer in South King County, said he was willing to negotiate a forbearance plan with Tran.
Tran said he’d rather fulfill his obligation, maybe with federal relief funds. But he fears he might lose the building. He said he worried that “if that happens, then all the tenants walk out empty-handed.”
“It’s certainly possible, if he doesn’t pay,” Tom said.
Real-estate analysts predict Seattle-area commercial vacancies will rise and rents will fall this year as businesses, some carrying debts, reopen to uncertain consumer demand.
Manuela Slye said she’s exploring whether she can break her leases for Cometa Playschool, the Spanish-immersion preschool she owns. The preschool, with two sites in Seattle, has been shut since early March. One landlord deferred three months of rent until autumn; to the other, she’s paying only maintenance fees, taxes and utilities, for the time being. But she doesn’t know how she’ll afford the about $12,000 in back rent coming due in September.
“As long as schools are not in session, I just want to see what my options are,” she said.
In the Seattle region, office vacancies are projected to reach as high as 14% by the end of 2020, an increase of nearly 40% from the end of 2019, according to Moody’s worst-case scenario. Rents could go down by nearly 10% in that period.
Cities with technology-dependent economies, like Seattle, will be shielded from the worst effects of what’s likely to be a long economic slowdown, analysts say. Amazon shares are at an all-time high amid a pandemic-fueled online shopping boom; the company, the region’s largest office tenant, occupies nearly 14 million square feet of office space across Seattle and the Eastside.
Still, demand for space is softening as employers weigh the risk of asking workers to return to offices.
The biggest worry for many of the region’s largest employers is “rushing back to work too soon,” said Kris Curtis, managing director at broker JLL in Seattle. “No one wants to be first, no one wants to make mistakes.”
Following the experiment forced on them by the pandemic, nearly three-quarters of employers plan to shift some employees to remote work permanently, a survey by research firm Gartner found. Seattle-based online real-estate brokerage Zillow announced April 24 it would allow employees to continue working remotely for the rest of the year; Amazon had similar news Thursday.
Coworking space in particular has taken a major hit in recent weeks as clients cancel their contracts.
WeWork, weighed down by its catastrophic attempt at a public stock offering, has asked landlords to cut its rent bills. In Pioneer Square, Impact Hall shuttered in early April, saying the coronavirus outbreak had accelerated financial headwinds already buffeting the coworking space, the Puget Sound Business Journal reported.
Seattle-based ActivSpace is offering May rent reductions of 10-50% if tenants were paid up and in good standing as of April 30. The landlord rents no-frills studios on month-to-month contracts, largely to people like aestheticians in sectors deeply affected by the shutdown.
The landlords and businesses most affected by the shutdown will be those with the least reserves to fall back on, Curtis said.
“It all really depends on how you came in to the COVID-19 situation,” she said.