SLIDING VALUE OF OFFICE SPACE HITS URBAN CENTERS

It’s old news to Trends Journal subscribers. We had forecast this back in March. But now it’s big news in the business media.

First hotels, then retail storefronts. Next, the value of office space, especially in urban centers, will shrink an average of 17.2 percent in 2020, says Moody’s Analytics REIS.

The value of retail storefronts already is down 19.2 percent this year and hotels are down 20.5 percent, the service has found.

As the economic shutdown has turned working at home from a trend to a widespread reality, companies are giving up leases or snagging bargain rents and shorter terms from landlords desperate to fill empty space.

Even a slight drop in occupancy can make an outsize hole in property owners’ profits because electricity and other utilities must be left on throughout buildings only partially leased.

Owners of office space are facing a liquidity crisis, said James Shevlin, president of CW Capital, a real estate firm. Tenants are pressing for cheaper rents or abandoning their office space entirely, leaving landlords without the cash to pay their mortgages or property taxes.

During past recessions, a 10-percent drop in pretax net income dropped property values 12.2 percent, Moody’s said, which impacts cities’ income from property taxes.

Share prices of Boston Properties Group, SL Green Realty Corp., and Vornado Realty Trust have tumbled 37 to 50 percent this year.

“If we can’t figure this out by the end of the year, then we’re going to have some big problems,” Shevlin said.

TREND FORECAST: What is happening now is unprecedented in modern history. Never before when there was an economic downturn or the fear of a flu or virus have millions of people escaped densely populated, high-end cities to exurban areas. Again, we had accurately forecast this back in March, and now it is reality.

Therefore, there will be less commerce generated from urban centers, which will push commercial real estate prices sharply lower.

This may reverse somewhat with the mass acceptance of a vaccine. However, the fear factor of other viruses, flus, social unrest, etc., and the trend to working at home will continue to weigh long term on commercial real estate values.