What’s the future of commercial real estate?
Talk about dodging a bullet. Adin Meir was just about to sign a lease for a new office for his company in March. “We decided not to pull the trigger,” he said.
Meir is President of CodeGreen Solutions, a consulting firm. As in many American companies, the company’s workplace is currently largely remote, “although we miss the office and the collaboration and innovation that takes place there.”
So they’ll get this new office space, but sometime in 2021. And it won’t be the office space that they envisioned a year ago. “At least first,” he said, “it will be smaller.”
About 25% smaller, he thinks. There are many companies out there talking about changing their commercial footprint. However, according to Christian Beaudoin, Managing Director of Research at JLL, one of the world’s largest commercial real estate services companies, this has not yet been shown in all areas. In some markets, such as Midtown Manhattan, vacancy rates are their highest since 2009. The long-term historical average of commercial office vacancy rates is 15.3% and the national vacancy rate is currently only 16%. “So we are not in an emergency yet,” said Beaudoin.
This may be the case in part because commercial leases are often long-lived – sometimes decades – and slowly turning around, with many companies trying to sublet unused office space in the meantime. It could also be that employers are unwilling to leave the office entirely.
“We surveyed thousands of employees and commercial property users,” said Beaudoin. “Most tell us they want to go back, just not every day.”
Hence, they may not reduce an office’s physical footprint, but rather the time spent there.
That would lessen the blow to commercial landlords.
At the same time, it’s clear that some companies just don’t need the footprint they once had, said Brian Graham, partner at Klaros Group. “People won’t go to the suburbs as often as they used to. People will not go to bank branches and use online banking instead. “
Beyond the short-term crisis that many landlords are currently facing, there will be long-term pressures. Jonathan Miller, president of valuation and advisory firm Miller Samuel, said these rental companies come in many shapes and sizes. “They could be anything from a public company to a private individual or a family,” he said.
And many of these landlords have debts to pay off. Commercial real estate is financed between 70% and 85% of debt on average. The remainder is in equity, according to Graham from Klaros Group. When losses pile up, for example because rents are falling, properties are vacant and debts are not being repaid. “It’s hard to imagine any lender getting away with it unscathed,” he said.
By the way, half of these lenders are banks. But this whole question of how big the offices will be is a long-term problem. Landlords, tenants and banks are currently trying to deal with this in the short term. Will the restaurant on the corner survive, much less pay rent?
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