Some are worried about a resurgence of Covid as we head into colder weather. Economist Brian Beaulieu thinks we should worry about some second order impact from the first wave; specifically, the impact of work from home on the commercial office market.
As office space leases come due, companies are cutting back on space required, moving to other locations, or negotiating lower rent. This could spell real trouble for the $3.6 trillion (not billion, TRILLION) in loans made by regional banks secured by these buildings. Another source I quoted in a March newsletter warned “The likelihood is that hundreds, perhaps thousands of these properties will wind up in the hands of creditors who, frankly, will be equally clueless as to what to do with them. There is one hope for legacy CBD (central business district) office space, namely the adaptive reuse of these properties for other individual or multiple uses. This kind of redevelopment requires special skills and experience that is hard to find. It also requires owners of these properties to get real about values so that new projects can begin.”
Mr. Beaulieu warns that as these loans go bad the banks holding them could accelerate a recession and/or convert a soft landing into a much harder one due to the tighter credit they’ll impose…Check out his analysis of the situation in his latest Fedwatch video.
