CFO Intelligence Magazine – Winter 2024
Andrew Zezas
Real Estate Strategies Corporation, Strategist and CEO
The U.S. commercial real estate market appears to be facing a potentially debilitating time bomb with a $1.5 trillion fallout and a 24-month fuse. Many middle-market and smaller commercial tenants could get caught up in the ensuing blast, warns Andrew Zezas, Strategist & CEO of Real Estate Strategies Corporation, a New Jersey-based corporate real estate advisory and transaction services firm. But forward-thinking occupants who plan ahead may be able to avoid the carnage, he adds
FOREVER LOANS — UNTIL THEY AREN’T
“Commercial real estate loans are often known as ‘forever loans,’ since landlords typically never pay off what are frequently interest-only loans — until they sell the property — instead typically rolling them over every five to seven years,” explains Zezas, Strategist & CEO of Real Estate Strategies Corporation, who also serves as Host, Publisher & CEO of CFO Intelligence magazine. “But in this cycle, the refinancing process may not be so simple, given the turbulence in the office market as remote employees balk at return-to-office mandates, driving companies to reduce their footprint, and occupancy rates plummet. The question is this: if landlords cannot secure replacement loans on viable terms, will this cause more building bankruptcies and drive other landlords to return their buildings‘ keys to the bank? That is already beginning to happen. Many commercial tenants believe that their leases will shield them if the above occurs, but unfortunately, that may not always be the case.“
It‘s not a theoretical question. The recent national office vacancy rate has jumped to nearly 18%, a 30-year high, while some individual markets, like San Francisco, are already at nearly 30%. These kinds of vacancies can make banks hesitant to refinance existing loans, especially given the Fed- and bank shareholder-driven tightened credit environment, positioning many properties for possible bankruptcy, sale, or other circumstances and, subsequently, new landlords.