Key Highlights

  • Retail space losing major tenants
  • Hotels running below 50% occupancy
  • Office buildings at risk as companies rethink work from home

The $15T commercial real estate market is bleeding. Retail giants such as Neiman Marcus and JC Penny have filed for bankruptcy, hotels are running with occupancy rates of less than 50% and smaller retail properties are losing tenants left and right. Even while tech behemoths such as Amazon, Face Book and Apple have been on spending sprees buying up iconic buildings in New York City to house their employees, many office buildings are sitting nearly empty while workers continue to work from home through the end of this year and into next.

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Meanwhile, mortgage payments on all that underused, unused, and/or vacant commercial property need to be made or else the commercial real estate world is facing a tsunami of downgrades, defaults and foreclosures.

Mike Flood, senior vice president of commercial and multifamily policy at the Mortgage Bankers Association, said, “Sometimes people forget the depth and breadth of what commercial real estate is.” The loss of paying tenants, from shopping centers to apartment buildings to hotels to office buildings, needs some help. Flood continued, “What’s at risk here is both the ability for people to stay in their apartments and the ability for people to go to their jobs. So unless there’s a stimulus, there’s a lot less to go back to once we get back to normal times.”

The now expired CARES Act did offer stimulus relief to residential property owners via forbearance programs but none to commercial property owners including mom-an-pop landlords. The Federal Reserve has packaged an increasing number of commercial loans into “special servicing” securities as the pandemic has continued but these relief measures may soon begin to slip.   And borrowers seeking loan relief or refinancing from lenders are having trouble because those borrowers have no clear projections of future revenue streams for their buildings.

Food said, “Every lender is trying to help regardless of the form of finance, but, sooner or later, the borrower needs customers.” According to Politico, “…one in five loans bundled into commercial mortgage-backed securities are on special servicing watch-lists, where loan servicers – the companies that collect mortgage payments and advance them to investors – flag potential obstacles to future payments, like a major tenant moving out.”

One quarter of all hotel loans are in special servicing today, according to CMBS, up from 1.9% at the end of 2019 as are 18.3% of retail loans, up from 5% at the end of last year. And, Flood said, a funded eviction ban, if there is a funded eviction ban in place, that requires landlords (without any rent relief to the landlords from the government) to subsidize struggling tenants with their housing costs expires on December 31.

Regardless of the property’s funding source (be that source the Federal Reserve, the 87% of public pension funds or the 73% of private pension funds that hold real estate investments, the huge hotel chains, giant corporate office space owners, the banks and lenders, the mom-and-pop landlords), Michael Bright, CEO of the Structure Finance Association, said that eventually, banks will have to “write down” properties that don’t recover…”and industry analysts aren’t sure which those properties will be.”

 

Thanks to Politico.

Also read: Tenancy-In-Common on the Radar in Los Angeles, Jerome Powell, Chair of Federal Reserve, Expects Interest Rates to Remain Near Zero for Years, America to Struggle More with Economic Disparities After COVID-19 Subsides


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