Virus slams commercial real estate, may end boom

Americans are likely to see more “for rent” signs in the coming months as many businesses devastated by the coronavirus pandemic abandon offices and storefronts and potentially end a long boom in the nation’s commercial real estate market.

Hotels, restaurants and stores that shut in March have seen only a partial return of customers, and many may fail. Commercial landlords have already reported a jump in missed rent payments. They expect vacancies to rise through the end of the year.

Two trends compound the problem: Office tenants are considering renting less space as more employees work from home, and the trend toward online shopping is accelerating, which could cut already weak demand for retail space in downtown areas and malls.

The swift emptying of commercial space marks a sharp departure from the real estate market that boomed in New York, Chicago and other cities in recent years. The virus outbreak has encouraged businesses to choose simplicity and convenience over the prestige of a big-city address.

The effect on landlords and local economies may be disastrous. A weak commercial real estate market can mean layoffs among its estimated 3.6 million workers and at companies providing goods and services to real estate firms. And a weak market draws fewer investors, limiting construction activity.

“There are going to be defaults and losses,” said Matt Anderson, managing director of data and research firm Trepp.

One in 5 loans tied to hotels is now delinquent, as are 1 in every 10 loans for retail properties, according to Trepp. Moody’s Analytics forecasts a record office vacancy rate of 19.4% by the end of the year, up from 16.8% last year.

Still, some real estate experts and landlords see this as just another boom-and-bust cycle. The next question is: How soon does the pandemic fade? When employees return to offices, they will likely go to restaurants, do quick shopping trips and rent hotel rooms during business travel. That will determine how fast the real estate market recovers.