Matthew Kurtz of Genoa Burns. – File photo
“Survive for 25 years” 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 three-way relationship of tenant, landlord, and lender has its own unique challenges. Consider:
- commercial tenant: Incumbents are still grappling with the problems started or crystallized by the coronavirus. Many businesses find that the amount of space in their current leases is not needed and is currently locked in above market rents, and landlords do not or cannot take back space due to financing constraints. you can't. According to CoStar, about half of office leases signed before 2020 have not yet expired.
- landlord: As of the fourth quarter of 2023, an astonishing 19.6% of office space in major U.S. cities was unleased, the highest in 40 years. The study found that 112 million square feet of office space will expire in 2024, and an additional 105 million square feet will expire in 2025, compared to the 21 million square feet that expired in 2023. , and there are signs that this trend will worsen. It is believed that much of this space will expire rather than be extended.
- Lender: Approximately $1.2 trillion in commercial mortgages are scheduled to mature this year and next, representing nearly a quarter of all commercial mortgages outstanding and the highest level since 2008. . Banks, especially small regional financial institutions, are dealing with a spate of foreclosures and defaults. Affecting a significant portion of portfolios, fewer loans are being approved and approval conditions are becoming more difficult, creating a vicious cycle that threatens to have a significant impact on the entire commercial real estate market.
With all this in mind, how do you survive in 2024? Here are some suggestions.
- Prepare: Whether you are a tenant or a landlord, the writing is on the wall that this year is going to be difficult. Marshall Assets working on strategic planning should not overextend and assume that this impending crisis will not affect them.
- Arrange a short-term extension of the loan before maturity: If your commercial loan is nearing maturity and your funds are maxed out, start talking to your lender about a short-term extension now.
- actively: This current situation has resulted in many borrowers being unable to comply with their loan financial covenants. As Jeffrey Rich, chairman of Genoa Burns Banking and Commercial Lending Group, suggests, borrowers should start considering discussions with lenders now, or they may have to wait until later. There is a risk of default and harsher penalties.
- Be flexible, but be aware of the following risks: Lease can be restructured to ensure relief is provided to tenants while allowing landlords to continue to comply with mortgage financial covenants. The key is rational risk allocation and not locking companies into short-term solutions in exchange for long-term risks.
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.
