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Fed Sounds Alarm on Commercial Real Estate and Business Bankruptcy

Mar 2, 2021

The February Monetary Policy Report sent to Congress by the Federal Reserve contained sobering news about commercial real estate. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable,” the report concluded. It also stated that business leverage is nearing historical highs.

Many businesses are struggling with debt or reduced demand in the wake of the COVID-19 pandemic. As of May 2020, it was estimated that more than 100,000 businesses had closed permanently since March.

The pandemic has taken a toll on business owners and created a crisis for commercial real estate as businesses file bankruptcy and abandon their office spaces. While commercial real estate prices remain high, the Fed says the market is vulnerable to steep declines, especially if lower demand during the pandemic becomes permanent. In other words, the damage that’s been done isn’t over.

After experiencing nearly a decade of increasing prices, many major cities are seeing a glut of office space and commercial real estate that’s unprecedented. In Chicago, for example, there is more than 5 million square feet of discounted sublease office space available in the downtown area — four to five times the norm — which depresses prices for the overall market.

There’s another trend that negatively impacts commercial real estate as well.

Woman at table with laptop

Increased number of work at home employees

The Impact of Work at Home

The work-at-home movement has largely been hailed as a success. Fewer than 20% of executives now support returning to staffing offices the way they were pre-pandemic, and 13% are considering going 100% virtual. This also reduces the demand for office space.

With budget pressures continuing in 2021, many CFOs are looking at ways to cut costs. According to Bloomberg, hundreds of corporations are looking at cutting real-estate costs by reducing office space, closing branch offices, or renegotiating leases.

Some businesses have already announced plans to cut back:

  • Nationwide Insurance is reducing its commercial real estate from 20 physical offices to four.
  • REI was nearing completion on an 8-acre headquarters, including a 380,000-square-foot building, when it abruptly put it up for sale as the company shifted to a more distributed workforce.
  • JPMorgan Chase is moving to a hybrid model where employees may work multiple days a week from home, allowing for shared office desks and a reduction in the overall office footprint.
  • Capital One is permanently moving its U.S. call centers to home-based work.

Commercial Mortgage Delinquencies

Meanwhile, commercial mortgage delinquencies continue to surge. While stocks have climbed 13% over the past year, the global index of real estate shares has dropped more than 10%, and risk premiums for mortgage-backed securities nearly doubled in 2020.

Experts worry it may be years before the commercial real estate market rebounds. If you’re looking for office space, this is a good time to strike deals. If your lease is coming due, you should explore options before signing.

If you’re facing bankruptcy or investigating your options, it’s time to seek professional advice. Contact Nevada’s premier commercial bankruptcy and litigation attorneys at Schwartz Law for an assessment.

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