Not could be, as in the future, but currently is, as in right now.
As long-term leases expire, more tenants are giving notice of non-renewal, because they're not using all the space they have. Many office buildings are facing declining revenues in the near term. Most cannot fulfill their monthly debt service obligations if tenant collections drop below ~80% leased, give or take.
Many regional banks, in particular, are loaded up with loans to office buildings.
It's not "becoming" a major risk. It already is a major risk:
* As long-term office leases expire, more tenants are giving notice of non-renewal, because they don't need as much space anymore.
* Many office buildings cannot fulfill their monthly debt service obligations if tenant collections drop below ~80% leased, give or take, at the old $/sqft.
* Many regional banks are loaded up with loans to office buildings likely to default in the near term.
* Downtown restaurants, pharmacies, shops, and other retail operations have lost a lot of foot traffic. Many are on the verge of shutting down.
* City governments depend significantly on downtown economic activity for tax collections. Local governments are likely to see a big hole in their finances.
All of this has been on economists' radar for well over a year:
Lease non-renewals will continue over the next 4-5 years. TBD on when defaults hit a tipping point or runaway failure, but it doesn't bode well for the particularly-exposed regional banks.
> About 700 office leases are likely to expire in 2023 and another 600 are up in 2024 in the Financial District alone, said Avison Young’s insights and innovation head Dina Gouveia, for a total of about 10 million square feet of office space. In 2025 and 2026, another 10 million-plus square feet are likely to expire.
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.
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.
Commercial leases can't be repurposed that quickly, and I suspect a lot of companies are holding off on doing anything different with their office space. If the past two years have resulted in permanent change, then some office space will likely get repurposed, but it's too early to tell whether it's permanent, and nobody wants to jump the gun and get it wrong.
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.
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.
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.
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
It doesn't seem wildly unlikely: there is a fundamental shift in how office spaces work.
But the other side is possible too: even if the loans had a guaranteed long term value (like SVB's bonds), they could be an issue in the short term. More so if getting the value out of the loan requires both time and effort (eg: legal costs).
That is not your typical company though. The typical company is leasing pretty cookie cutter office space in an office park or downtown. And many of those companies are not renewing many of their leases as they come up.
it's also possible for offices to be doing poorly but also still make more money than as a residential property. while vacancy rates are high, those vacancies are spread around, so some people are still renting in these office buildings. if you want to redevelop them you have to get the existing tenants out.
Office/Commercial space is usually leased on much longer intervals than 1 year. It has to be or it would make no sense to complete the necessary renovations.
What do you mean exactly? Is there a conspiracy from people who own commercial real estate to force people who lease that space to renew their leases? Are employers stuck in a sunk cost fallacy where they just can't conceive of letting something they paid for go to waste until their lease is up?
One of the larger companies I'm most familiar with is definitely not renewing leases on a fairly widespread basis. I'm sure some companies feel they're locked in for some reason but it's just not universal.
As long-term leases expire, more tenants are giving notice of non-renewal, because they're not using all the space they have. Many office buildings are facing declining revenues in the near term. Most cannot fulfill their monthly debt service obligations if tenant collections drop below ~80% leased, give or take.
Many regional banks, in particular, are loaded up with loans to office buildings.
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