Commercial real estate is getting hit from all sides.
Barely a day goes by where there is not an article about the plight of malls and retail real estate. This is coming as a surprise to nobody.
However, this is only a piece of the puzzle. Office space is also going to see its share of hammering based upon the results of a survey of CEOs.
The result is that 76% of the CEOs expect to rent less real estate in the future.
If this comes to pass, it will be quite a blow to the commercial real estate market. As companies cut their footprint due to employees working from home, this is going to send shock waves through the entire ecosystem.
There are hundreds of billions in debt out there which is at risk of default. Many of the same companies that are on the hook for retail debt also strayed into the office space realm.
Earlier in the year, companies, especially retailers, made a lot of noise when they started withholding rents from mall owners as the shutdown from the pandemic took hold. This put those entities in a tough cash flow position. At the same time, many retailers ended up in bankruptcy, which could further complicate matters for the landlords.
Technology is changing a great many things. The work from home idea is the result of technological progress over the last decade plus. Since people can do that, paying a large sum of money each month just to bring employees into a centralized location to do work they can do from home.
The CMBS market is really feeling the pinch. Here is the default rates over the past year.
Even though things have improved a bit since the peak in June, they still are more than 4 times at the time when the Coronavirus kicked off. If this paper ends up defaulted upon, billions will have to be written off.
Is there a commercial real estate crisis on the horizon? Thus far, the moves by the central bank and others have "kicked the can down the road". However, at some point the reckoning will come. Since landlords depend upon rent being paid on time, unless things improve significantly in a short period of time, the commercial real estate sector will really be in a bind.
Major markets are taking the hit. Since they have the most valuable real estate, this is where companies are going to start cutting first. About 6 months ago, I was talking to a guy who owns an IT company. He related how the principle partner in a law firm talked about downsizing their company due to work from home: the annual rent savings, $2 million.
This is just one company in a single city. It employs a few hundred people. Consider the amounts that a company like Nationwide or other insurance companies can save. It will run into the hundreds of millions of dollars.
It comes directly pockets of the landlords. In these situations, this is large entities with huge real estate holdings. They are leveraged to the hilt meaning that interruptions in cashflow can have catastrophic impacts.
Here is one of the major influences that could completely keep the economy from recovering. Some cities could see a downturn for the better part of this decade.
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