Don't know squat about corporate real estate, but why would lease terminations occur en masse in Q2 2021?
I would expect that a sliding window of leases would be expiring all the time, and that the bloodbath would be slightly more gradually occurring right now.
A close relative of mine is a top real estate appraiser based in San Francisco, and she's terrified about what happens in Q2 2021, when leases will start terminating en masse. She's had a call with the St. Louis Fed, as they're trying to get an idea of what this will look like. She thinks it will be a bloodbath, and deal a death blow to corporate real estate (and other capital markets by extension).
Yes, and we are seeing it, but there are many leases continuing until Q2 2021 (and beyond). The past few months have seen a slow and gradual decline, but a fair number of leases are still being paid and are locked in. Q2 2021 is when that decline accelerates and drops off a cliff.
tbd. no collapse yet because commercial leases typically last multiple years. Many leases are coming up for renewal in the next year, however. Might very well see a recession in commercial real-estate soon.
wow, never heard of that before. It is interesting though. I think long-term leases are going to disappear things are moving too fast and changing very quickly for anyone to commit to long term leases
There is certainly worry that as lease contracts expire, the combination of higher interest rates and vacant offices will create huge losses for real estate developers, and these can cause a cascading domino effect of further losses.
How the communication flows from the government or RE developers to executives is beyond my understanding, but it looks like there is not much willingness to rethink how corporate office space can be used in other ways, and more willingness to just go back to the status quo.
This could spiral as a corporate landlord will need to raise lease charges to compensate which might cause more tenants to leave. I've seen this tactic used when they want turnover on tenants.
Business owners are adapting just fine. Commercial real estate owners are in big trouble.[1] That article says that most office real estate is leased for five years with an option to renew. Many of those renewals are not happening.
> I wonder what will happen in SF/NYC when more of the office leases have expired and the corporate property tax base erodes?
Large metropolises will manage potential budget shortfalls how they will.
More importantly, after large commercial leases expire, commercial property owners and their management companies will adjust their commercial rents until companies and institutions find value. While some concerns go remote-only, others will implement hybrid or even full RTO. The price and associated tax revenue on these commercial leases will stabilize and, more than likely, increase as the economy increases.
The expiration of corporate leases will not usher municipal financial apocalypse as many observers seem to speculate. Rental market corrections unavoidably will lag pandemic economic contraction (leases take time to expire) and such contractions hardly signal the end of commercial and corporate interests in renting urban real estate.
A lot of those five-year contracts were negotiated before Covid and I suspect they will expire in the next year or two. After a certain point, the building owner will have to choose between lowering rents, or having the building foreclosed on due to having no tenants.
Also, at the beginning of Covid, several big businesses just refused to pay retail rent as a negotiating tactic. It would not surprise me if that happens again.
To me the interesting thing is how this plays out vs. commercial real estate market. Rentals in commercial real estate are generally long term (e.g. 3 years or longer). In general companies probably only started serious decision making in 2022 after it become clear "work from home" was not going away after seeing that offices are still partly empty most of the time.
That suggests we're probably going to start seeing a commercial real estate collapse, beginning some time in 2024 as significant numbers of rental agreements expire.
If that's true, I wonder what impact this will have on cities in general? There are so many potential knock-on consequences it's hard to predict outcomes.
Yeah this has to be long-term catastrophic for commercial real estate, which was already on the rocks. My previous company commissioned/leased and furnished an entire 12 story building in 2019, and now it's practically abandoned. Who is going lease such a thing afterwards? Seems grim to me.
At least in NYC, many commercial leases are 20 or 30 years. I imagine WeWork gets similar terms. In highly appreciating markets (London, NYC) towards the end of such a long lease (the last ten years or so), the lessee is paying well under market rate, and the lease becomes an asset rather than a liability. So if office real estate continues an upward trajectory for a decade or so, they can easily weather a downturn if it occurs in the later part of their lease term.
If it happens in the next 3-5 years, it’ll probably be catastrophic for them.
I have to think that as a society, we’re going to be introducing a lot of slack that never existed before. Consider commercial real estate: there are going to be loads of small businesses that can’t make rent in the next 3 months... but from a landlord’s perspective, it probably doesn’t make sense to terminate the lease (or hound the business into bankruptcy or something), because who the hell else are they going to get to rent the place?
I suspect basically all commercial landlords are going to have to consider rent deferrals or outright eating 3-6 months of rent. The alternative very likely could be the majority of their properties simply becoming vacant, which isn't a good business stance for coming out of all this.
I would expect that a sliding window of leases would be expiring all the time, and that the bloodbath would be slightly more gradually occurring right now.
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