Contrary to popular belief, landlords have struggled tremendously in 2020 – particularly those in the commercial real estate market. Despite many believing that all landlords are large corporations with limitless funds, this is most often far from the case. In fact, many commercial landlords are small family-owned operations that have suffered greatly amid the Coronavirus pandemic. While this year has been particularly arduous, it is soon coming to an end, leaving many landlords wondering what 2021 will bring for the commercial real estate market.
Commercial Real Estate in the New Year
Due to the COVID-19 pandemic, businesses began opting for hybrid offices or ditching physical office space altogether; however, current vacancy rates across the country vary. In some markets – like New York – vacancy rates are the highest they’ve been since 2009. Despite this, the long-term historical average of commercial office space vacancy is 15.3% and the current national vacancy rate is 16%.
Commercial vacancy rates could potentially be due to the length of commercial leases, which can range from years to even decades in duration. Additionally, these spaces turn over slowly and many businesses have turned to subletting as a means to keep them occupied and help manage rent payments. Despite subleasing, it’s unlikely that businesses will be able to operate as they once did. Real estate industry experts posit that businesses won’t need the same amount or type of space they previously occupied before the pandemic.
Unfortunately, beyond the short-term issues many landlords have been facing, there are still long term pressures. Many landlords have debts that need to be paid by tenants who have underpaid or forgone rent payments entirely. These longer-term issues entail dealing not only with tenant debts to landlords, but also with debts landlords owe to lenders. In fact, on average, most commercial real estate is financed (70% to 85%) by debt. Meaning that, if losses pile up because rent is not being paid, properties then go vacant, and debts will be unable to be paid back. This potential future could leave commercial landlords in a much worse state moving forward.
What Commercial Landlords Should Expect
Commercial landlords should still anticipate challenges in 2021, but there are several leasing trends expected to grow in prominence in the New Year. For instance, shorter lease terms are projected to continue because those who once entered into long-term contracts for office spaces are seeking leases much shorter in duration. In fact, the industry anticipates more commercial leasing agreements of less than 10 years will be signed in 2021. However, many are expected to be renewals rather than new leases. In addition to shorter leases, sublease agreements will be increasingly used due to companies temporarily cutting back on the need for larger business spaces, with many operations reassessing just how much space they will need moving forward.
Despite commercial tenants having options for lease adjustments, some will still attempt to take advantage of their landlords. Throughout the COVID-19 pandemic, commercial tenants, particularly large-brand name retailers, have refused to make timely and/or full rent payments, with some even skipping out on rent entirely. These actions have had a major impact on commercial landlords without the means to support their businesses without receiving rent on time – leaving them struggling to stay afloat. Because these instances have unfortunately become all too common, it’s important for commercial landlords to consult with experienced commercial lease dispute attorneys.
Commercial Lease Dispute Attorneys
Commercial lease disputes have become particularly prevalent as a result of the COVID-19 pandemic’s impact on the usage of office space. Despite many businesses having the means to pay rent, they have instead delayed or underpaid their rent, or opted out of their leases entirely. At Raizner Law, our legal team has years of experience representing commercial landlords in Texas and across the nation. If you are a commercial landlord struggling with a large or national tenant that is delaying or refusing to make rent payments, contact us today to learn more about how we can help.