The sudden rise in interest rates has left many Commercial Real Estate Owners are gasping. This is a tsunami of disaster for landlords who own office and retail space and did not expect anything like this, threatening the entire real estate ecosystem of the country.
Not only are mortgage rates skyrocketing with no signs of easing in sight; Remote Work And with the rise of e-commerce, previous tenants have vacated buildings and are not expected to return. Big cities like New York have was particularly hard hit difficult.
“you literally “Trillions of dollars of investment have suddenly been significantly impaired,” said Dan Zwaan, chief executive officer of Arena Investors, a New York-based asset management and real estate investment firm. The Wall Street Journal“People thought these office buildings would be there forever. Of course. it is 98% are leased in perpetuity.”
Property owners are living on borrowed time
According to a real estate consulting firm ColliersVacancy rates for commercial buildings in the United States in As of the fourth quarter of 2023, that figure is 17%, higher than during the financial crisis of 2008. Forgive lenders don’t want to be saddled with foreclosed properties they can’t sell. Such The court proceedings have been postponed. The remaining tenants who have not fallen behind on their rent are holding on, and for the time being the building remains standing.
However, the building is not fully leased. parallel The looming deadline means maintenance issues are piling up and insurance will be hard to find for a building on the brink of bankruptcy. can Seeing the situation worsening, they decided to cut their losses.. The New York Times Many commercial buildings All over the country teeth Sale Discounts range from 50% to 80%.
As this cycle continues, it’s not just high-rise commercial landlords who are suffering: Landlords and businesses across major cities are being hit by worker displacement, and local government budgets that rely on taxes tied to valuable commercial real estate are facing shortfalls as falling property tax assessments reduce revenue.
How vacant offices impact cities and small homeowners
When people no longer need to live in a city for work, the entire infrastructure of that city suffers, including the small landlords who provide housing for them. Not surprisingly, home prices have fallen, as a housing shortage and high interest rates have forced people to continue renting instead of buying. Huge Since the pandemic began, there has been a growing trend to move away from expensive northern cities.
New York City is the most affected, according to census data. 78,000 people will leave the country in 2023In New York state as a whole, 102,000 people died. Most of the people who left New York were not millionaires, but lower- and middle-class people earning between $32,000 and $65,000. to be tied up People who moved to expensive cities were happy to give up high rents and cold weather.
The impact of vacant offices on lending to banks and other small investors
according to Moody’s AnalyticsThe national office vacancy rate is record 19.6% in the fourth quarter of 2023. 1979 If only the office was this empty.
If landlords foreclose or sell for less than they owe, this could create big problems for banks with lots of commercial real estate debt. whole It will impact the lending industry and affect small landlords seeking real estate financing.
“We saw this play out last year as banks had problems and that created uncertainty in the markets,” said Dan Roccato, a clinical finance professor at the University of San Diego. CBS“That uncertainty ripples through the stock market, that uncertainty ripples through the real estate market, and then that uncertainty shows up in 401(k) plans at the end of the month.”
As a result, cities may seek to make up for shortfalls in tax revenue from distressed properties or the sale of discounted commercial buildings by increasing residential property tax or sales tax revenue.
The waiting game gets harder
“Survive to ’25” is a phrase landlords struggling with high interest rates probably didn’t expect to hear the Fed say for the first time earlier this year. A series of rate cuts. but, inflationThe United States’ tight grip on the U.S. economy and Fed Chairman Jerome Powell’s steadfast refusal to cut interest rates until they come down have left investors, homeowners and many politicians in a quandary. Hands squeezed In despair.
As we can see from distressed commercial property sales and floating rate syndications. Housing loanIt is becoming increasingly difficult to maintain the current level of debt that is below the surface. Banks are also feeling the pressure to cover debt that is expected to reach $10 billion over the next decade. To be repaidOn average, commercial real estate loans make up more than one-fifth of a U.S. bank’s total loan portfolio. Many commercial property owners are paying down debt to extend their loans until interest rates fall.
New York landlords SL Green and Vornado, according to an analysis by CRED iQ, $100 million extension $1.08 billion loan for the office building at 280 Park Avenue Mid-April. Other owners have decided they can no longer afford to continue paying off their debts and would be better off directing their funds elsewhere. this It’s similar to what happened during the financial crisis of 2008. There is a limit to how much time we can wait.
“Last year, borrowers were saying, ‘I just need three more months before interest rates start to cut,'” said Alex Killick, managing director at real estate services firm CWCapital Asset Management. The Wall Street Journal“You don’t hear that anymore. Powell has made it very clear that this is the new normal.”
Final thoughts
Exiting real estate is always the last option for investors when the financial burden becomes unbearable. What frustrates many commercial property owners is the fact that the Fed has threatened to cut interest rates. after that They will inevitably happen, but the most important question is when.
Meanwhile, the ropes holding commercial buildings, lenders, owners, and the entire real estate infrastructure together are beginning to loosen, threatening businesses, livelihoods, and cities.
While no one saw the pandemic coming, its aftermath will force politicians and landlords to better prepare to respond to other black swan events, the root of which is interest rates, fueling the runaway inflation caused by the Fed’s easy monetary policy.
Other countries It recovered from the pandemic faster than the United States without any inflation or rising interest rates. Lessons must be learned.
In the meantime, Jerome Powell needs to give the public some hope. For landlords who stand to lose their buildings and their occupants’ homes, citing hard economic data is not enough.
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BiggerPockets notes: These are opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.