Matthew Kertz of Genova Burns. – Archive photo
“Survive to '25” has become a popular phrase among commercial real estate professionals – because everyone in the industry knows that 2024 will be a difficult year.
Each player in the venerable triad of tenant, landlord and lender has their own problems. Hold:
- Commercial tenants: Those in power are still dealing with the problems that have arisen or emerged from COVID. Many companies have found that they do not need the space provided for in their current leases and are now paying above market rents. Landlords do not want or cannot take back the space due to financing bottlenecks. According to CoStar, almost half of the office leases signed before 2020 have not yet expired.
- Landlord: A staggering 19.6% of office space in major U.S. cities was unleased in the fourth quarter of 2023, a 40-year high. There are signs that this trend will only get worse, as studies suggest that 112 million square feet of office space will expire in 2024 and another 105 million will expire in 2025, as opposed to the 21 million square feet that expired in 2023 . It is believed that much of this space is falling into disrepair rather than being expanded.
- Lender: Approximately $1.2 trillion in commercial mortgages are expected to mature this year and next, nearly a quarter of all outstanding commercial mortgages and the highest level on record dates back to 2008. As banks, particularly small and regional lenders, grapple with a cascade of foreclosures and loan defaults impacting a significant portion of their portfolio, fewer loans are being approved and approval conditions are becoming more stringent, creating a vicious cycle, which threatens to have a significant impact on the entire commercial real estate market.
Given this, how do you survive in 2024? Here are a few suggestions:
- Be prepared: Regardless of whether you are a tenant or a landlord, the signs are clear that the coming year will be difficult. Organize assets, do strategic planning, don't overwhelm yourself, and don't assume that this looming crisis won't affect you.
- Get a short-term extension on your loan before it is due: If your commercial loan is nearing maturity and your resources are exhausted, start the conversation with your lender now for a short-term extension.
- Be proactive: This current climate has resulted in many borrowers defaulting on the financial covenants of their loans. As Jeffrey Rich, chairman of Genova Burns Banking & Commercial Lending Group, suggests, borrowers should begin discussions with their lenders now or risk default and harsher penalties later.
- Be flexible, but also think about the risks: Lease agreements can be restructured to ensure that tenants are relieved while ensuring that landlords continue to honor the financial covenants of their mortgages. The key is to allocate risk appropriately, not to lock the company into a short-term solution in exchange for long-term risk.
Matthew Kertz is a partner at Genova Burns, where he is chairman of the firm's Commercial Leasing Group and co-chair of the firm's Distressed Assets Commercial Assets Real Estate Task Force.
