2020s commercial real estate distress
{{Short description|Period of distress in commercial real estate markets}}
2020s commercial real estate distress was a worldwide spike in commercial real estate distress that began in the 2020s in the wake of the COVID-19 pandemic and interest rates hikes by central banks in response to the 2021 inflation crisis. Although the increase in distress occurred globally it was most acute in the United States and China.
This spike in the number of properties at risk of foreclosure by lenders or of being returned to lenders by their owners, as well as general financial difficulty for REITs and other real estate firms—occurred due to several factors. These include changes in the habits of workers and consumers caused by the COVID-19 pandemic, which has decreased office occupancy and exacerbated the ongoing retail apocalypse, and interest rate hikes by central banks to combat the 2021-2023 inflation surge, which have increased the cost of borrowing and the cost of interest payments on variable rate loans.
Distress in the United States
=Background and causes=
==United States office glut==
In the United States, an office surplus predates the COVID-19 pandemic.{{cite news |last1=Putzier |first1=Konrad |title=America's Office Glut Started Decades Before Pandemic |url=https://www.wsj.com/articles/americas-office-glut-started-decades-before-pandemic-11661210031 |access-date=23 June 2023 |work=The Wall Street Journal |date=23 August 2022}} Overdevelopment, partially attributable to Reagan administration changes to the tax code, as well as a failure to demolish unused buildings, have both contributed to the excess space. Despite a slump in office leasing due to the 2007–2008 financial crisis and its long-term impact, landlords continued to build office space. Excess space has impacted the office vacancy rate in Texas in particular.{{cite news |last1=Putzier |first1=Konrad |title=Texas Cities Are Booming, but Their Offices Are the Most Vacant |url=https://www.wsj.com/real-estate/commercial/texas-cities-are-booming-but-their-offices-are-the-most-vacant-4cffb565 |access-date=10 October 2023 |work=The Wall Street Journal |date=9 October 2023}}
Sam Zell also blamed co-working firms for disguising the glut by renting large amounts of office space to sublet it, which they then failed to fill with tenants.
==Retail apocalypse==
{{main|Retail apocalypse}}
The term "retail apocalypse" refers to the mass closure of brick-and-mortar stores by retailers which accelerated in 2017 and was further exacerbated by the COVID-19 pandemic.{{cite magazine|url=https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/|title=What in the World Is Causing the Retail Meltdown of 2017?|first=Derek|last=Thompson|date=April 10, 2017|access-date=April 10, 2017|magazine=The Atlantic}}{{cite news |last1=Foroohar |first1=Rana |title=How to survive the Covid-19 retail apocalypse |url=https://www.ft.com/content/013e6518-06c8-419b-a9eb-4368533228ab |access-date=26 July 2023 |work=The Financial Times |date=20 September 2020}}{{cite news |last1=Goolsbee |first1=Austan |title=Never Mind the Internet. Here's What's Killing Malls. |url=https://www.nytimes.com/2020/02/13/business/not-internet-really-killing-malls.html |access-date=26 July 2023 |work=The New York Times |date=13 February 2020}} These closures have been blamed on ecommerce, income inequality, big box stores, and an increasing preference by consumers to spend on services rather than products, and debt.{{cite news |last1=Townsend |first1=Matt |last2=Surane |first2=Jenny |last3=Orr |first3=Emma |last4=Cannon |first4=Christopher |title=America's 'Retail Apocalypse' Is Really Just Beginning |url=https://www.bloomberg.com/graphics/2017-retail-debt/?sref=CIpmV6x8 |access-date=26 July 2023 |work=Bloomberg.com |date=8 November 2017 |language=en}}
==COVID-19 pandemic and remote work==
===2020-2022: Abrupt transition===
Due to the COVID-19 pandemic and COVID-19 lockdowns, many workers abruptly transitioned from working in an office to working from home in March 2020.{{cite news |last1=Paul |first1=Kari |title=Twitter announces employees will be allowed to work from home 'forever' |url=https://www.theguardian.com/technology/2020/may/12/twitter-coronavirus-covid19-work-from-home |access-date=23 June 2023 |work=The Guardian |date=12 May 2020}} Pre-pandemic, only 3% of American workers claimed to mostly work from home;{{cite news |last1=Arbogast |first1=Iris |last2=Gascon |first2=Charles S. |last3=Spewak |first3=Andrew |title=Working from Home: More Americans Are Telecommuting |url=https://www.stlouisfed.org/publications/regional-economist/third-quarter-2019/working-home-more-americans-telecommuting |access-date=23 June 2023 |work=Federal Reserve Bank of St. Louis |date=9 October 2019}} millions transitioned to such arrangements due to the pandemic.{{cite news |last1=Cramer |first1=Maria |last2=Zaveri |first2=Mihir |title=What if You Don't Want to Go Back to the Office? |url=https://www.nytimes.com/2020/05/05/business/pandemic-work-from-home-coronavirus.html |access-date=23 June 2023 |work=The New York Times |date=5 May 2020}} As early as April 2020, commentators including Larry Fink predicted this shift would have a negative impact on demand for commercial real estate and, specifically, office space.{{cite news |last1=Massa |first1=Annie |title=Larry Fink Sees More Remote Work Hampering Commercial Real Estate |url=https://www.bloomberg.com/news/articles/2020-04-23/fink-sees-more-remote-work-hampering-commercial-real-estate?sref=CIpmV6x8 |access-date=23 June 2023 |work=Bloomberg |date=23 April 2020}}
In June 2020, Kastle Systems established a "back-to-work barometer" designed to track office occupancy in major American cities.{{cite news |last1=Salmonsen |first1=Mary |title=Kastle Systems Launches Nationwide 'Back to Work Barometer' |url=https://www.builderonline.com/money/economics/kastle-systems-launches-nationwide-back-to-work-barometer_o |access-date=23 June 2023 |work=Builder |date=22 June 2020}} Kastle manufactures and maintains security systems for commercial buildings, and these systems include terminals for office employees to swipe access cards to enter their place of work.{{cite news |last1=Holder |first1=Sarah |title=Meet Kastle Systems, the Covid-Era Kings of Back-to-Work Data |url=https://www.bloomberg.com/news/articles/2022-10-13/will-remote-works-ever-return-to-office-this-company-is-trying-to-find-out?sref=CIpmV6x8 |access-date=23 June 2023 |work=Bloomberg.com |date=13 October 2022 |language=en}} The "Back to Work" barometer tracks card swipe data and uses those numbers to track office occupancy. Kastle reported a decline, from a normalized rate of 96% occupancy in early March 2020, to approximately 18% occupancy by the first week of April 2020.
===2022-present: "RTO" and remote work resilience===
Major finance firms Goldman Sachs and Morgan Stanley began easing COVID-related restrictions related to in-office work in August 2022.{{cite news |last1=Scheer |first1=David |title=Goldman and Morgan Stanley Ease Covid Rules, Clearing Path to Desks |url=https://www.bloomberg.com/news/articles/2022-08-30/goldman-morgan-stanley-ease-covid-rules-clearing-path-to-desks?sref=CIpmV6x8 |access-date=28 July 2023 |work=Bloomberg.com |date=30 August 2022 |language=en}} Despite policies instituted by some companies to mandate in-person office work,{{cite news |last1=Gindis |first1=Mia |last2=Constantz |first2=Jo |title=Citigroup, Google Among Firms Tightening Return-to-Office Rules |url=https://www.bloomberg.com/news/articles/2023-03-15/return-to-office-companies-cutting-back-work-from-home?sref=CIpmV6x8 |access-date=28 July 2023 |work=Bloomberg.com |date=15 March 2023 |language=en}} the push to "return to office" was characterized by Rani Molla in Vox as "not that robust" in June 2023.{{cite news |last1=Molla |first1=Rani |title=The "return to the office" won't save the office |url=https://www.vox.com/technology/2023/5/15/23721410/return-to-office-remote-work-commercial-real-estate |access-date=28 July 2023 |work=Vox |date=15 May 2023 |language=en}}
In the United States, as reported in June 2023, office occupancy was approximately 50% of pre-pandemic occupancy rates.{{cite news |last1=Grant |first1=Peter |title=Slow Return to Work Pummels Office Stocks |url=https://www.wsj.com/articles/stock-prices-of-office-landlords-plummet-as-short-sellers-pile-in-9373fc95 |access-date=23 June 2023 |work=The Wall Street Journal |date=22 May 2023}} A higher proportion of office workers in Europe and Asia have returned to full-time to the office.{{cite news |last1=Putzier |first1=Konrad |title=As Americans Work From Home, Europeans and Asians Head Back to the Office |url=https://www.wsj.com/articles/as-americans-work-from-home-europeans-and-asians-head-back-to-the-office-db6981e1 |access-date=23 June 2023 |work=The Wall Street Journal |date=28 February 2023}} In February 2023, the Wall Street Journal reported that office occupancy in Europe and the Middle East was between 70 and 90% of pre-pandemic rates, while in Asia occupancy was generally at 80% or higher, and in some places exceeded pre-pandemic rates. In May 2023, Canadian real estate firm Colliers reported that the vacancy rate for New York City office space was 17.4%, and that some 94 million square feet of office space was listed for lease in the city, a record amount.{{cite news |last1=Haag |first1=Matthew |title=What Record Office Vacancies Mean for New York City's Economy |url=https://www.nytimes.com/2023/05/05/nyregion/nyc-office-space-vacancy-rates.html |access-date=25 June 2023 |work=The New York Times |date=5 May 2023}} Office vacancies in the United States reached the highest point in twenty years in October 2023.{{cite news |last1=Quinio |first1=Akila |title=Office space vacancies in US and London reach at least 20-year highs |url=https://www.ft.com/content/698f41af-0d88-424b-80b0-241be01dac35 |access-date=10 October 2023 |work=Financial Times |date=10 October 2023}}
Economic research firm Capital Economics predicted in June 2023 that the value of office buildings in the United States would not reach the values they held before the pandemic until 2040, due to the broad transition to remote work.{{cite news |last1=Gittelsohn |first1=John |title=US Office Owners Get Dire Warning: Rebound Unlikely Before 2040 |url=https://www.bloomberg.com/news/articles/2023-06-22/office-owners-get-dire-warning-rebound-unlikely-before-2040?sref=CIpmV6x8 |access-date=26 June 2023 |work=Bloomberg |date=22 June 2023}}
==Inflation and rate hikes==
{{main|2021-2023 inflation surge}}
Beginning in mid-2021, inflation surged internationally. This rise in inflation has been attributed to several causes, including pandemic-related economic dislocation, supply chain problems, the fiscal and monetary stimuli provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic, and price gouging. In response to this rise in inflation, central banks raised interest rates,{{Cite web |last=Weber |first=Alexander |date=February 2, 2022 |title=Euro-Zone Inflation Unexpectedly Hits Record, Boosting Rate Bets |url=https://www.bloomberg.com/news/articles/2022-02-02/euro-zone-inflation-unexpectedly-quickens-to-record-testing-ecb |url-status=live |archive-url=https://web.archive.org/web/20220212182256/https://www.bloomberg.com/news/articles/2022-02-02/euro-zone-inflation-unexpectedly-quickens-to-record-testing-ecb |archive-date=February 12, 2022 |publisher=Bloomberg }}{{Cite web |last= |date=January 14, 2022 |title=India's Dec WPI inflation at 13.56% as firms fight rising costs |url=https://www.reuters.com/business/indias-dec-wpi-inflation-eases-marginally-1356-yy-govt-2022-01-14/ |url-status=live |archive-url=https://web.archive.org/web/20220212182259/https://www.reuters.com/business/indias-dec-wpi-inflation-eases-marginally-1356-yy-govt-2022-01-14/ |archive-date=February 12, 2022 |publisher=Reuters }}{{Cite web |last=Kihara |first=Leika |date=January 14, 2022 |title=Japan's wholesale inflation at near record high on broad price gains |url=https://www.reuters.com/markets/asia/japans-wholesale-prices-rise-10th-month-weighs-corp-margins-2022-01-14/ |url-status=live |archive-url=https://web.archive.org/web/20220212182257/https://www.reuters.com/markets/asia/japans-wholesale-prices-rise-10th-month-weighs-corp-margins-2022-01-14/ |archive-date=February 12, 2022 |publisher=Reuters }}{{cite web|url=https://apnews.com/article/why-is-us-inflation-so-high-4b603a7fff0503360d5cc17a82f17ab1|title=As the causes of US inflation grow, so do the dangers|author=Christopher Rugaber|website=Associated Press |date=July 13, 2022 }} increasing the cost of borrowing.{{cite news |last1=Sidders |first1=Jack |title=Why a Crisis Is Looming in Commercial Real Estate |url=https://www.bloomberg.com/news/articles/2023-06-21/why-a-crisis-is-looming-in-commercial-real-estate-quicktake-lj5qetss?sref=CIpmV6x8 |access-date=23 June 2023 |work=Bloomberg.com |date=21 June 2023 |language=en}}
=Distress=
==2020==
File:Transamerica Pyramid from Coit Tower.jpg
In early 2020, some office and retail tenants were unable to pay rent, withheld rent, or began to negotiate the terms of their leases in response to general economic uncertainty caused by the COVID-19 pandemic.{{cite news |last1=Grabar |first1=Henry |title=Red April |url=https://slate.com/business/2020/03/coronavirus-rent-landlords-strike-unemployment.html |access-date=25 June 2023 |work=Slate |date=27 March 2020}}{{cite news |last1=Dougherty |first1=Conor |last2=Eavis |first2=Peter |title=Tenants' Troubles Put Stress on Commercial Real Estate |url=https://www.nytimes.com/2020/06/05/business/economy/coronavirus-commercial-real-estate.html |access-date=23 June 2023 |work=The New York Times |date=5 June 2020}} Simon Property Group, an American real estate investment trust that invests in shopping malls and outlet centers, sued clothing retailer Gap, Inc. for unpaid rent in June 2020.
Overall commercial real estate transaction volume fell substantially in the second quarter of 2020.{{cite news |last1=Gittelsohn |first1=John |last2=Buhayar |first2=Noah |title=Distress Mounts in U.S. Property Market Frozen by Pandemic |url=https://www.bloomberg.com/news/articles/2020-07-22/distress-mounts-in-u-s-real-estate-market-frozen-by-pandemic?sref=CIpmV6x8 |access-date=25 June 2023 |work=Bloomberg.com |date=22 July 2020 |language=en}} This decrease, a decline of 68% in volume compared the second quarter of 2019, occurred in part due lack of consensus on the value of assets. Individual transactions were also impacted. The Transamerica Pyramid, contracted before the pandemic to sell for approximately $700 million, sold at a 10% discount under the originally negotiated price in July 2020,{{cite news |last1=Waxmann |first1=Laura |title=Exclusive: Transamerica Pyramid sale goes forward at a discount |url=https://www.bizjournals.com/sanfrancisco/news/2020/07/06/transamerica-pyramid-sale-san-francisco-cre.html |access-date=23 June 2023 |work=San Francisco Business Times |date=8 June 2020}} which Josh Barrow, writing for New York, attributed to the impact of the pandemic.{{cite news |last1=Barro |first1=Josh |title=Here's What the Trouble in Commercial Real Estate Means for You |url=https://nymag.com/intelligencer/2020/07/coronavirus-possible-permanent-effect-on-retail-real-estate.html |access-date=23 June 2023 |work=Intelligencer |date=8 July 2020 |language=en-us}} In April 2020, Blackstone elected to walk away from a deal to purchase an office building in Oakland, California, losing a $20 million deposit as a result of the choice.{{cite news |last1=Buhayar |first1=Noah |title=Blackstone Abandons $20 Million Deposit on Scrapped Office Deal |url=https://www.bloomberg.com/news/articles/2020-04-01/blackstone-abandons-20-million-deposit-on-scrapped-office-deal?sref=CIpmV6x8 |access-date=25 June 2023 |work=Bloomberg.com |date=1 April 2020 |language=en}}
Anticipating the ability to acquire properties at a discount due to distress, investment and private equity firms raised a considerable amount of capital in 2020.{{cite news |last1=Gose |first1=Joe |title=Distressed Real Estate Market Beckons Opportunistic Buyers |url=https://www.nytimes.com/2020/05/26/business/distressed-commercial-real-esate-coronavirus.html |access-date=27 June 2023 |work=The New York Times |date=26 May 2020}}{{cite news |last1=Grant |first1=Peter |title=Cash Pours Into Distressed Real-Estate Funds as Investors Aim to 'Play Offense' |url=https://www.wsj.com/articles/cash-pours-into-distressed-real-estate-funds-as-investors-aim-to-play-offense-11587470400 |access-date=27 June 2023 |work=The Wall Street Journal |date=21 April 2020}}
==2021==
Transaction volumes for multifamily, life science, and industrial assets rebounded in late 2021.{{cite news |last1=Grant |first1=Peter |title=Commercial Real-Estate Sales and Values Surge to Records |url=https://www.wsj.com/articles/commercial-real-estate-sales-and-values-surge-to-records-11635249600 |access-date=27 July 2023 |work=The Wall Street Journal |date=26 October 2021}} Transaction volume for office assets and malls remained low, as "return to work" pushes were had a more muted than expected impact on office attendance due to the Delta variant.{{cite news |last1=Putzier |first1=Konrad |last2=Grant |first2=Peter |title=Office Occupancy Sputtered in August as Delta Variant Foiled Return-to-Work Hopes |url=https://www.wsj.com/articles/office-occupancy-sputtered-in-august-as-delta-variant-foiled-return-to-work-hopes-11631016001?mod=article_inline |access-date=27 July 2023 |work=The Wall Street Journal |date=7 September 2021}}
Distress in China
{{multiple image
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| image1 = Commercial Real Estate Sold in China Per Month.webp
| caption1 = Commercial real estate sold in China per month
| image2 = Sales Revenue from Commercialized Real Estate Sold in China.webp
| caption2 = Sales revenue from commercialized real estate sold in China (yearly)
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=2020–present: property sector crisis=
{{main|Chinese property sector crisis (2020–present)}}
Despite the "three red lines", regulations introduced to control the borrowing of Chinese real estate firms, the Chinese real estate developer and conglomerate Evergrande released a statement on 31 August 2021, warning it would default on its debts if it failed to raise enough cash to cover them.{{Cite news|title=Heavily indebted Chinese developer Evergrande warns of default risk |url= https://www.ft.com/content/e870dd10-223c-411e-9e72-53c3b8e609b6|url-status=live|access-date=2021-09-21|newspaper=Financial Times|date=31 August 2021|last1=Hale|first1=Thomas|archive-date=22 September 2021|archive-url= https://web.archive.org/web/20210922191118/https://www.ft.com/content/e870dd10-223c-411e-9e72-53c3b8e609b6}} At the time, Evergrande was China's most indebted real estate developer. On 24 September 2021, Evergrande missed off-shore bond payments totaling US$83.5 million. While the company had 30 days to avoid defaulting on the debt, analysts felt the company would likely fail to pay its creditors.{{Cite news |last1= Hale |first1= Thomas |last2= Kinder |first2= Tabby |last3=Lockett|first3=Hudson|last4=Yu|first4=Sun|date=2021-09-24|title=Evergrande bondholders left in the dark as crucial deadline passes|work=Financial Times|url=https://www.ft.com/content/e7c0f31d-4dff-4992-88e6-a70402b7b4bc |access-date=2021-09-24|archive-date=24 September 2021|archive-url=https://web.archive.org/web/20210924094933/https://www.ft.com/content/e7c0f31d-4dff-4992-88e6-a70402b7b4bc|url-status= live}}