I don't normally get involved in
commercial real estate, but lately I've seen some trends that are
sure to have some impact on the residential market as well. However,
before I continue, I need to note that as with any type or real
estate, there are often local conditions and variations that run
counter to prevailing trends.
The concept of commercial real estate
can be quite appealing. The idea of long term triple net leases
where the tenant pays the taxes, insurance, and at least a portion of
the maintenance can seem pretty good. The flip side of this is that
when the property goes vacant, it usually is not rented the next
month by someone ready to move in. It can be a few months if things
go well, it can be many months or more if things aren't going well –
and now, in many large cities, things are not going well.
Everyone is aware that some businesses
have been damaged by the hideout-at-home thinking brought on by the
Chinese flu. That is just one of the influences on the current
market, but it may be a primary factor leading to several others.
The Rotten Apple
The problem causing the most angst
nationally is the flight of residents from New York City. But it's
not just the worker and consumer bees heading out of town. This
urban abandonment along with restrictive regulations has caused some
businesses to see up to an 85% reduction in revenue. This no way to
survive.
Fixed expenses go on, and on. Site
rent – something far from insignificant in Manhattan goes on. Many
are just giving up and closing down completely. Commercial property
owners in New York and other major cities are faced with shrinking
demand and fixed payments of their own. Some have the resources to
weather the financial storm. Those with insufficient capitalization
could be facing a financial crisis of their own.
Multiple Factors
The Chinese flu has caused a couple of
things to happen, First, the faint of heart are loathe to go out in
public. Second, many with the resources are bailing on many major
cities – not just New York – trying to avoid the dreaded flu.
Then there are travel/quarantine restrictions killing off the tourist
trade. If that doesn't hurt enough, many who used work in the
shining skyscrapers are now working from a spare bedroom at home.
As the TV commercials say. “But wait,
there's more!” Public safety has taken a hit in many areas as the
increasing hostility toward law enforcement has brought about a
reduction in their presence and a not-surprising lack of public
confidence. That lack of confidence has been justified as the
despised and ridiculed police have not been permitted to stop rioters
and looters, even petty shoplifters, from doing further damage to
many downtown businesses.
Logical Reaction
With all this going on, who can blame
enterprises large and small from abandoning downtown and surrounding
areas? We've even seen the mayor of Chicago begging companies like
Walmart to stay in her out-of-control domain. It's like. what do
they have to lose? Merchandise? Buildings? Employees lives?
It comes down to a simple business
decision. And these decisions are made over and over again. Big
companies with the resources simply close up shop and move to greener
pastures. Mom and Pop shops sadly fade away. But the results are
the same: empty storefronts, empty offices, reduced property values,
and reduced tax base... and fewer places for those left behind to buy
clothing and groceries, or eat out – making the area even less
desirable. It is reported that there are a record number of rental
units available in New York – and it's doubtful that the Big Apple
is all alone.
What Happens Now?
Having escaped from New Jersey many
years ago, it is astounding to me that denizens of New York are
buying some of the few homes available across the Hudson River site
unseen for more than the listing price – such is the desire of the
of the affluent class to escape from the city. Others are left
behind in a city many years away from recovery.
New York is just one of many urban
areas to experience this exodus of the business community. Portland,
Minneapolis and Chicago to name a few have seen businesses destroyed
by angry mobs. Many never to be seen again. And others that are
have not been destroyed are getting out while the getting is good.
Long Term Impact
So businesses are leaving urban areas.
Those that stay have many remote workers with only occasional visits
to the office. This is an unanticipated consequence of the Chinese flu that
attacked our nation. With the necessity to disburse and the
technology available to do it, we have found a new way of working and
companies have found a more economical and efficient way of getting
the job done. The cube farm may no longer be the dominant home of
the information worker.
There is a long term reduction in the
demand for office and retail space all over the urban landscape.
This will impact the real estate market, the financial market, and the
housing market. The time is not to panic, but to plan – plot and
scheme, perhaps - if you are in the commercial real estate business.
The Opportunities
As the old English proverb that says:
It's an ill wind that doesn't blow anybody any good. Things are not
going well, but opportunities still remain. A great many fortunes
were made during the great depression. We have been told by people
from Viktor Frankl to John Maxwell that what happens to us is not as
critical as how we respond to it.
It is reported that Amazon is looking
at putting distribution centers in abandoned mall anchor stores. There
may be bargains to be found in the real estate itself – but it is
only a bargain if you know what to do with it. This applies to small
strip shopping centers as well as downtown skyscrapers.
We can't spend too much time listening
to the media mavens of malaise. Remember, this is the country that
played a large role in defeating the Nazi empire and the collapse of
the Soviet Union. It is also the country that put men on the moon.
If that spirit and determination has not been educated out of us, we
will figure this situation out as well.
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