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Real estate: The coming crash in commercial property

Don Kanare and Sabrina Bellecci
Special to the Tribune
Don Kanare and Sabrina Belleci, ReMax Realty
Provided

Weekly real estate update

Statistics gathered from the Incline Village Multiple Listing Service on May 10

Houses Condos PUDs

For Sale 76 50 14

Under $1 million 12 32 5

Median Price For Sale $2,295,000 $715,000 $1,146,200

YTD Sales 2020 33 43 12

YTD Sales 2019 39 48 18

New Listings 9

In Escrow 4

Closed Escrow 3

Range in Escrow $429,000 - $895,000

These statistics are based on information from the Incline Village Board of Realtors or its MLS as of May 10.

Depending on who you talk to the outlook for the economy ranges from a rebound during the second half of 2020 to the beginning of a new Great Depression.

While the crystal ball might be cloudy in that regard one thing that is highly probable is the upcoming crash in the commercial real estate market. This crash will not just affect properties in the United States but could ripple through the entire world.

There are numerous reasons we believe that commercial real estate is not a good place for most investors at this time. The enormous reduction in employment is leading almost every business to reevaluate their staffing requirements.

It is also causing businesses to reconsider just how much office space they really need when many desk jobs can easily be accomplished from a home office. With a vaccine for the coronavirus anywhere from several months to many years away, social distancing in the workplace is here to stay for a while.

A top executive at Morgan Stanley remarked recently that they have been able to run their operations completely without anyone coming into a regular office setting.

The same goes for numerous other firms in finance, high-tech and other sectors of the economy.

For many employees as long as they have access to the internet they can accomplish the vast majority of their workload. So, what does this mean for commercial real estate especially large office buildings, office parks and skyscrapers?

Many employers will develop strategies so that a significant percentage of their staff can work from home permanently with an occasional need to come into the office.

This means that as leases come up for renewal businesses will reduce their footprint and also seek to aggressively lower their total overhead. Some companies will try to retrofit their offices with plexiglass or other types of dividers between workspaces.

But for the vast majority of businesses the coronavirus situation is an opportunity to completely rethink who are the really important employees and just how much office space they actually need.

There are a lot of businesses especially restaurants and retail shops that are currently unable to pay their monthly rent.

In some cities between 50% and 70% of the commercial tenants paid their rent for the month of May.

The owners of commercial buildings cannot pay their mortgages, taxes, insurance, maintenance and other ongoing costs unless they receive rent from all of their tenants.

The gap between income and expenses for commercial property owners will only widen in the coming months. Since most commercial buildings have some type of mortgage this is going to create a huge cash flow problem for the various individuals and entities that own these properties. We envision a massive restructuring in the commercial real estate market as defaults occur in big cities and small towns alike. One of the biggest problems will be in the expensive metropolitan areas where there has been significant new construction in the past 10 years.

Generally commercial real estate is constructed using very sophisticated financial projections for income and expenses.

The rapid rise in real estate prices and rents during the past eight years is now being impacted by business closings which lead to vacant storefronts and shortfalls in rental income. Buildings under construction might have difficulty finding commercial tenants to lease the available space.

Ultimately there will be an enormous glut of vacant commercial real estate. When this oversupply of office space is combined with a big decrease in demand the results for the commercial real estate market could be catastrophic.

Don Kanare is the founder and Sabrina Belleci is the owner and broker of RE/MAX North Lake in Incline Village.


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