The concept of switching off the main breaker to the economy is hard to grasp for anyone who took Economics 101.  It appears likely that there will be a higher percentage of small business fatalities than human as a result of the COVID-19 pandemic.  Applying that notion to the commercial real estate markets, the natural question is…are rents dropping?  Let’s take a look at that.

 

Right now, commercial real estate leasing is experiencing a spasm of paralysis.  A couple of weeks ago, tenants and landlords alike were saying “let’s wait a couple of weeks and see how this is going to shake out.”  Now they are stretching that out a couple of more weeks.  Most tenants had enough capital and optimism reserves to pay all or part of their April rent.  But when May comes around… it won’t be pretty.

 

Come mid-May, tenants that are in a position to move forward with lease commitments (i.e. very well capitalized or “essential” businesses) will be in a very advantageous position, in my estimation.  Landlords will consider generous free rent or delayed delivery propositions that they would have waved off just a month ago.

 

My projections are that rents will soften but not drastically – maybe 10% to 15%.  Property owners cannot just drop rents willy nilly – they have financing obligations to meet and will have limited room to move. 

 

If it looks like the shutdown of the economy will extend much beyond July 1, I will have a reforecast…if I haven’t jumped off the balcony by then.   

 

If you or your clients are feeling unsure about their options or strategy going forward with respect to their business real estate, feel free to reach out to me for guidance at (213) 258-6921.