Financial reports from the past two weeks are reinforcing the common view of commercial real estate, which is that businesses are using less space and are paying less in rent.
A Dow Jones story focuses on recent reports from two office space owners operating mostly in the Northeast. Both are reporting lower occupancy rates, and they are making rent concessions to keep tenants. A positive note is that not many of their long-term office tenants are in such financial distress that they are having trouble paying the rent. However, when leases expire, many tenants are taking the opportunity to move out or shut down.
A similar picture is seen in recent reports from retail leasing operations. They are reporting a small but significant part of revenue in the quarter coming from lease terminations, the lump sum payments that tenants make as they move out early. This means that store closings are continuing and retail occupancy rates will be declining. These reports also show that the investors that own retail space are having to reshuffle their financial arrangements in order to meet obligations to their lenders, most of whom are very large banks. As vacancy rates go up next year, we are sure to see more commercial real estate owners unable to refinance and facing foreclosure or bankruptcy. This, in turn, will put further downward pressure on rents.
