"This year, the standards to what was once considered "normal" have been constantly disrupted and reshaped. But for some sectors of our economy, the greatest trouble hasn't even started yet. That's the struggle thousands of U.S. commercial real estate owners are about to face early next year. In 2020, property owners have seen their buildings shut down during several rounds of restrictions, leaving many of their tenants unable to afford their back rent and making the whole sector question the practicality of its own operations. As the remote work trend gains force, and travel and tourism continue to be impaired by the fallout of the health crisis, in addition to the progressive bankruptcy of retailers, restaurants, and hotels, commercial real state space has been sitting empty, while, on the other hand, mortgage-based securities keep falling into delinquency.
The latest evaluations of the sector are leading strategists to worry about the enormous financial distress these owners will have to cope with over the next months, which could potentially result in a catastrophic banking crisis, considering their credit is already compromised and the economic outlook doesn't look promising enough for owners to regain their ability to pay off their debt. But so far, the commercial real estate market hasn’t really had a reckoning. However, experts warn that this is set for a change. That's what we are going to investigate in this video.
All across the country, offices, restaurants, gyms, stores, and hotel rooms are getting increasingly vacant due to the new round of lockdowns. The sanitary outbreak has prompted a major relocation of the masses, driving people to fly away from metropolitan areas seeking more affordable housing and a scape from the mounting social turbulence we all have been witnessing over the course of the year. Cities are being hollowed out due to the shift to remote working, the preference for online shopping, and the obstacles surrounding business and touristic traveling. That has caused a huge shock to commercial properties of almost all descriptions.
The imminent threat of bankruptcies and defaults has already led banks to tighten credit and lending, which means, commercial borrowers are likely to face even bigger hardships to access the loans and refinance their debt to weather the coming storm. Recent Federal Reserve data suggests that the overall stakes have never been higher. Nationwide, commercial property debt skyrocketed to a record-high of $3.06 trillion in the third quarter from a 10-year low of $2.2 trillion in 2012. In some states, such as New York, the situation is way more complicated. With approximately $1.1 billion worth of property loans now considered distressed in Times Square, the latest property evaluation indicated that the value of properties has been slashed by 80% to about $92.5 million.
The Big Apple’s overbuilt hotel industry has a large excedent of vacant rooms, with four out of five properties backed by hotel mortgage bonds now presenting signs of strain. But hotels aren't the only ones in deep trouble. The retail apocalypse has provoked a major crunch in commercial real estate, and since a considerable amount of those stores were permanently closed, that will create a glut of retail space in a country that already had too much of it.
Up until now, the owners of two sizable portfolios of over 130 shopping malls have filed for bankruptcy after a series of stores and restaurants either shut down their activities or lost their means to pay their rent. Multiple leading companies are announcing an inevitable shift to remote working. In short, office owners in many high-cost areas are going to have to get used to higher vacancy rates, since things won't probably ever come back to "normal".