• Fri. Feb 23rd, 2024

    Surviving the Challenges of 2024 in Commercial Real Estate

    ByJames Forsyth

    Feb 6, 2024
    Surviving the Challenges of 2024 in Commercial Real Estate

    The year 2024 looms ahead, and professionals in commercial real estate are bracing themselves for a turbulent period. Traditional players in the industry — tenants, landlords, and lenders — all face their own unique set of challenges. The impact of the COVID-19 pandemic continues to reverberate, leaving a trail of uncertainty. However, amidst the chaos, there are strategies that can help businesses survive and thrive during this difficult year.

    Commercial tenants find themselves grappling with the aftermath of the pandemic. Many companies have realized they no longer require as much office space as they once did. Unfortunately, they are locked into leases with above-market rents, and landlords either cannot or will not take the space back due to financial constraints. According to data from CoStar, close to half of office leases executed before 2020 are still in effect.

    For landlords, the situation is no less challenging. In major U.S. cities, a staggering 19.6% of office space remained unleased as of the fourth quarter of 2023, marking a 40-year high. The upcoming years paint an even bleaker picture, with studies suggesting that 112 million square feet of office space will expire in 2024, and an additional 105 million square feet in 2025. This contrasts sharply with the 21 million square feet that expired in 2023, indicating a potential surge in unoccupied space.

    Lenders, on the other hand, face a mountain of maturing commercial mortgages. Approximately $1.2 trillion of commercial mortgages are set to mature in 2024 and 2025, representing almost a quarter of all outstanding commercial mortgages. Amidst rising foreclosures and defaults, many small and regional lenders are struggling to approve new loans and imposing more stringent approval conditions. This cycle threatens to significantly impact the entire commercial real estate market.

    In order to survive the challenges of 2024, there are several strategies to consider:

    1. Be prepared: Whether you are a tenant or landlord, anticipate that the upcoming year will be arduous. Strategize, safeguard your assets, avoid overextension, and acknowledge that the crisis may indeed affect you.

    2. Secure a short-term loan extension: If your commercial loan is nearing maturity and resources are tight, initiate discussions with your lender about the possibility of a short-term extension.

    3. Proactively address financial covenants: Many borrowers find themselves out of compliance with their loan’s financial covenants as a result of the current climate. It is advisable to reach out to lenders to discuss options and mitigate the risk of default and severe penalties.

    4. Find a balance between flexibility and risk: Explore lease restructuring options to provide relief to tenants while ensuring landlords remain in compliance with their mortgages’ financial covenants. Strive for reasonable risk allocation and seek long-term solutions rather than short-term fixes.

    As we navigate the challenges that 2024 presents, these strategies can serve as a lifeline for those operating in commercial real estate. By preparing, communicating, and adapting, businesses can weather the storm and emerge stronger on the other side.

    An FAQ Section: Commercial Real Estate Strategies for 2024

    Q: What challenges do commercial tenants face in 2024?
    A: Commercial tenants are grappling with the aftermath of the COVID-19 pandemic. Many companies realize they no longer need as much office space as before but are locked into leases with high rents. Landlords may not be able to take back the space due to financial constraints.

    Q: What challenges do landlords face in 2024?
    A: Landlords are facing a significant challenge as a record-high percentage of office space remains unleased in major U.S. cities. Studies suggest a surge in unoccupied space in the coming years, which will place additional pressure on landlords.

    Q: What challenges do lenders face in 2024?
    A: Lenders face a large number of commercial mortgages maturing in 2024 and 2025. This represents a substantial portion of all outstanding commercial mortgages. Rising foreclosures and defaults have made it difficult for small and regional lenders to approve new loans and impose stricter approval conditions.

    Q: What strategies can help businesses in commercial real estate survive in 2024?
    A:
    1. Be prepared: Anticipate that the upcoming year will be challenging and strategize accordingly. Safeguard assets, avoid overextension, and acknowledge the potential impact of the crisis.
    2. Secure a short-term loan extension: If your commercial loan is nearing maturity and resources are tight, discuss with your lender the possibility of a short-term extension.
    3. Proactively address financial covenants: Many borrowers are out of compliance with their loan’s financial covenants due to the current climate. Reach out to lenders to discuss options and mitigate the risk of default.
    4. Find a balance between flexibility and risk: Explore lease restructuring options to provide relief to tenants while ensuring landlords remain in compliance with their mortgages’ financial covenants. Seek long-term solutions.

    Definitions:
    – Commercial Real Estate: Property used exclusively for business purposes, including offices, retail spaces, industrial properties, and more.
    – COVID-19 pandemic: A global pandemic caused by the COVID-19 virus. It has led to widespread health, social, and economic impacts worldwide.
    – Leases: Contracts that allow tenants to occupy and use a property in exchange for payment to the landlord.
    – Mortgages: Loans secured by property or real estate. In commercial real estate, mortgages are often used to finance the purchase or development of properties.

    Suggested Related Links:
    CoStar: Leading provider of commercial real estate information, analytics, and online marketplaces.
    National Association of Real Estate Investment Trusts (NAREIT): A trade association representing real estate investment trusts (REITs) and other real estate companies.