Coronavirus fallout: Is commerical real estate headed for a crash?
SAN DIEGO — Within the next week, David Marino will list nearly 300,000 square feet of sublease office space in San Diego’s Sorrento Mesa neighborhood that current tenants no longer need.
For Marino, a principal at the Hughes Marino commercial real estate brokerage firm that specializes in representing tenants, these subleases are an early wave of what he expects to be a tsunami of unwanted office space flooding the market in coming months in the wake of COVID-19 shutdowns.
Social distancing, plunging revenue and layoffs already have wreaked havoc on certain commercial real estate sectors, such as hotels, malls, movie theaters and non-essential retail. Office space could be next.
“Most companies have now realized that they can work as effectively remotely, and some employees actually like it,” said Marino. “Office tenants contemplating their future requirements are going to be leasing less space than they have now.”
That could create ballooning supply starting this summer — a surplus that might make the Tech Wreck of 2000 and the Great Recession of 2008-09 “look like a rounding error,” said Marino.
“This is going to be much more like the early 1990s when we had the Savings & Loan crisis and over-development of office buildings and foreclosures,” he said.
As a tenant representative, it’s in Hughes Marino’s interest to portray the market as favoring tenants, though Marino insists he has no ill will toward landlords. But in March his firm raised eyebrows among building owners when it sent out an email offering to help companies restructure leases as rents “collapse” amid the pandemic.
That decline hasn’t shown up in the numbers yet. Vacancy rates are up in San Diego County, but not by a huge amount, according to real estate industry research firm CoStar.
Real Estate Investment Trusts that own office buildings nationwide are still collecting roughly 90% of rent from tenants — even though employees are largely working from home.
“When you look at the overall collection rate for office, it has been really strong,” said David Rodgers, senior research analyst with RW Baird. “That to me is fairly logical. Office tenants, particularly those in high-quality buildings, they put a lot of money into that space. That is home base for their operations.”
According to Rodgers, the key question is how many office jobs will evaporate permanently during a recession sparked by the pandemic, and how many companies will shift a majority of their employees to remote work.
“I think what you are likely to see is businesses (that are struggling) will likely go to work-fromhome because it is more efficient,” he said. “Others will take more space. It comes down to how many jobs are going to be lost.”
While it’s still in the early innings, there are signs that employers are embracing remote work across a number of industries, including tech, finance and consumer goods. Nationwide Insurance, Facebook and Twitter are among the companies nationally that have signaled that their need for physical office space will be significantly reduced in the future. Morgan Stanley and Barclays have made similar statements.
The Charlotte Observer announced last week that it will exit its physical office space, with personnel working from home through the remainder of 2020. The newspaper aims to find new office space in 2021.
“The million-dollar question is what is going to happen to office, and in my opinion, there is going to be some carnage,” said Eric
Northbrook, managing director of Voit Real Estate Services in San Diego. “We are going to lose some tenants, and there is going to be some additional space on the market.
“On the other hand, you have companies that want their people in the office,” he continued. “With social distancing and the new way that they have to occupy office space, they may have to take a little more space to accommodate all of their people. So it’s too early to tell.”
For employers, having workers in the office helps to build company culture, enabling mentoring, brainstorming, collaboration, team bonding, socialization and the ability to get things done without interruption from children.
“I think what is going to happen with the office sector is you are no longer going to be a second-rate employee if you decide to just work on the fly,” said Nathan Moeder, a principal at London Moeder Advisors, a real estate consulting firm.