Before the COVID War, owners of office blocks leased to single or a few major tenants counted their blessings: they had fewer tenants to deal with, bigger companies were more likely to pay rent on time, and more likely to sign long-term leases.
That all instantly flipped when COVID arrived and people stopped commuting and started to work remotely from home.
Now, a number of those once-comfortable landlords are in danger of losing their properties to foreclosure as businesses negotiate for less space, lower rents, or decline to renew their leases altogether.
Near Houston, oilfield services company Schlumberger filled more than half of a 100,000-square-foot building but walked away when the lease expired in February. The next month, landlord Tanglewood Property Group defaulted on its mortgage, as reported by the Wall Street Journal.
Houston’s office vacancy rate was 25.7 percent in this year’s first quarter, up from 23.9 percent year on year, according to Moody’s Analytics.
Johns Hopkins University was the only tenant in a 56,000-square-foot block outside Baltimore. Shortly after the school chose to let its lease expire, the owner was facing default.
At 1740 Broadway in Manhattan, L Brands holds two-thirds of the building, owned by asset manager Blackstone Group and valued at $605 million, but has told Blackstone it will not renew when its lease runs out next March.
Even with a year’s notice, Blackstone might scramble to fill the space: the number of new leases signed on the island in this year’s first quarter was a third fewer than a year earlier.
A vacating tenant is the most common cause of mortgage defaults on office properties, Manus Clancy, senior managing director at real estate research firm Trepp, told the WSJ.
Even when tenants stay on, landlords now typically find that they need to lower rents and perhaps also offer perks, such as redecorating or adding two or three months of free rent.
TREND FORECAST: As working from home becomes more of the new normal and people commute to work less often, we maintain our forecast for a commercial real estate bust in many major cities. And, commercial landlords, especially smaller ones, will find it hard to pay property taxes, which will rob cities of desperately needed income to maintain services.
As we have forecast and is now a reality, as people lose everything and have nothing left to lose, crime rates will rise… and, as we have detailed in the Trends Journal, they have surged in many large cities. Thus, the higher crime rates climb, the more people will want to escape to suburban and ex-urban areas.
While there will be an urban bounce-back, it will take several years. During that time, as the small commercial landlords go broke, private equity groups, hedge funds, and major commercial real estate firms will buy up what is being lost, thus controlling yet a greater percentage of global assets.
