“Survive to ’25” has become a popular phrase among professionals in commercial real estate — because everyone in the industry knows 2024 is going to be a rocky year.
Each of the players in the venerable trifecta of tenant, landlord and lender are having problems of their own. Consider:
- Commercial tenants: Those in office are still addressing the problems that began or were crystalized by COVID. Many companies have found that they do not need the amount of space on their current leases and are locked in now above market rents, and landlords will not or cannot take the space back due to financing constraints. According to CoStar, nearly half of office leases executed pre-2020 have yet to expire.
- Landlords: An astonishing 19.6% of office space in major U.S. cities wasn’t leased as of fourth quarter 2023, a 40-year high. There are indications that suggest this trend is going to get worse as studies indicate 112 million square feet of office space is due to expire in 2024, and 105 million more will expire in 2025, contrasting with the 21 million square feet that expired in 2023. The belief is that much of this space will expire rather than be extended.
- Lenders: Approximately $1.2 trillion of commercial mortgages are scheduled to mature this year and next, nearly a quarter of all outstanding commercial mortgages, and the highest recorded level going back to 2008. As banks, especially small and regional lenders, are grappling with cascading forecloses and defaults impacting a substantial portion of their portfolio, fewer loans are being approved and the conditions for approval are becoming more onerous, creating a vicious cycle that threatens to significantly impact the entire commercial real estate market.
With all of this in mind, how does one survive in 2024? Here are some suggestions:
- Be prepared: Tenant or landlord, the writing is now on the wall that this upcoming year is going to be difficult. Marshal assets, engage in strategic planning, do not overextend and do not assume that this looming crisis will not impact you.
- Procure a short-term extension of your loan before maturity: If you have a commercial loan about to mature and have stretched resources, start the conversation with your lender now for a short-term extension.
- Be proactive: This current climate has placed many borrowers out of compliance with their loan’s financial covenants. As suggested by Jeffrey Rich, chair of the Genova Burns Banking & Commercial Lending Group, borrowers should begin exploring conversations with their lenders now, or else risk default and harsher penalties later on.
- Be flexible, but also be mindful of the risks: Leases can be restructured in order to ensure relief is provided to tenants, while still ensuring landlords continue to be in compliance with their mortgages’ financial covenants. The key is reasonable risk allocation, and not binding the company to a short-term solution in exchange for long-term risk.
Matthew Kertz is a partner at Genova Burns, where he chairs the firm’s Commercial Leasing Group and co-chairs the firm’s Distressed Assets Commercial Assets Real Estate Task Force.