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The ongoing retail apocalypse and the commercial real estate crisis are creating a domino effect of bankruptcies and foreclosures, and increasing socio and economic difficulties for workers while destroying several iconic businesses across the U.S. The huge rental debt load accumulated throughout 2020 and the high rates of vacancy in office and commercial space are weighting upon the real estate market, which was already on a path for a correction before widespread lockdowns slowed down economic activity and social-distancing mandates started to force workers to stay at home. Now, experts are warning that the multi-faced crisis the real estate market is currently facing might not only result in a crash, as it could potentially generate much more financial pain for the entire country in the months ahead. That’s what we investigate in this video.
Reports displaying pictures of empty stores in previously scorching hot markets are becoming more frequent as the U.S. has been losing some of its most iconic businesses to the current recession. In New York, famous stores based in SoHo and other parts of Manhattan are failing as residents have fled away from the city to find safer spots amid the growing social turbulence. Consequently, only between February and October last year, more than 30,000 retail jobs were lost in the city.
Foot-traffic has remarkably declined in the face of continued stay-at-home mandates, and most of these stores are struggling to make enough revenue to survive, and particularly, to afford their luxury rental payments. According to Crain’s New York, retail spaces in the Fifth Avenue shopping district between 49th and 59th streets had an average of over $3,000 per square foot. In that way, a 2,500 square foot store, for instance, would pay $7.5 million in rent each year under these lease terms. Conversely, if that store starts missing rental payments, the losses the landlord would face would also be in the range of millions of dollars.
As it is getting incredibly hard to find paying tenants to occupy the emptied space, landlords have been lowering rent prices and, in some cases, even bailing out some store chains to help keep business alive. According to Bloomberg, cheap funding costs have extended a lifeline to many troubled big retail store chains, which has helped to decelerate the pace of U.S. bankruptcy filings, but small shops, offices, and hotels continue to be particularly vulnerable to the effects of the health crisis. King & Spalding’s financial analyst, Sarah Borders, has pointed out that the real estate industry is “facing an existential crisis of what’s next”.
We haven’t even started addressing how relentless the recession has been for the office real state market yet. As more and more CEOs move the headquarters of their companies away from metropolitan areas, the rates of vacant office space on the market are exploding to all-time highs, exceeding prior records set during the Financial Crisis and the Dotcom Bust, to 13.9 million square feet, according to Cushman & Wakefield.
The economic advisor, Sacha Lord, maintained that the ongoing retail apocalypse and the commercial real estate crisis will create a domino effect of closures and increase socio and economic hardships unless spaces are promptly repurposed. In short, pretty much every segment of the real estate sector is facing a crisis of its own. When both commercial and housing market crises are added together, we have one of the biggest debt crisis in all U.S. history.
While prices of commercial properties have been sharply declining, housing prices are now in the most splendid bubble ever recorded, and it goes without saying that this unbalance is going to make conditions pretty unsustainable very soon. Just as for the stock markets, it isn’t easy to accurately forecast the precise time a crash will occur, but by analyzing historical patterns, it is possible to see when one is coming. And knowing that at this stage of the economic downturn we’re trapped into an everything bubble, it’s just a matter of time until the real estate market blows up in the air and repeat the same scene we’ve watched during the last bubble burst – only this time, things are bound to get much uglier.
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