How Tenants Can Thrive in a High-Interest, High-Vacancy CRE Market with CARMEN’s Expertise

How does high interest rates and high vacancy affect you the tenant??

According to a WSJ article from January 16^th, in 2023, $541 billion in debt backed by office buildings, hotels, apartments and other types of commercial real estate came due, the highest amount ever for a single year. In addition, more than $2.2 trillion in debt is maturing before 2028, meaning property owners need to pay their mortgages back before then. With that given, property owners will need to refinance at a much higher rate in most cases. Pair this with the highest average office vacancy rates in more than forty years, the effects will be felt by more than just the lender and borrower.

Despite the obvious sounds of doom and gloom, these factors could have trickle-down effects on the tenants of commercial properties.

1. Uncertainty and Disruption: Tenants may face uncertainty about the future of their lease and the property. The defaulting landlord might not be able to fulfill their responsibilities, leading to disruptions in property management, maintenance, and services. Building owners may also have a difficult funding new leases with construction and brokerage commission costs. The vacancy may begin to increase as leases expire.
2. Lease Enforcement: The new owner or the entity handling the defaulted property may have different priorities or may choose to enforce lease agreements differently. Tenants might experience changes in lease terms, conditions, or rent structures. This is somewhat unlikely, but possible if a property goes into receivership (court controlled), goes to a special servicer, or goes back to the lender through a foreclosure.
3. Maintenance and Repairs: A defaulting landlord may neglect necessary maintenance and repairs, impacting the overall condition of the property. This could lead to dissatisfaction among tenants and affect the functionality of their business spaces ultimately leading to higher vacancy as tenants move out.
4. Financial Implications: Tenants may face financial challenges if the default leads to increased operational costs or unexpected lease modifications. Although debt service (mortgage payments) should not have an implication on building operational costs, high vacancy will cause the existing tenants to share more of the expenses to operate the building.
5. Legal Proceedings: Tenants might become involved in legal proceedings related to the default, especially if there are disputes over lease agreements, security deposits, or other contractual matters.

Now, let’s cover some of the BENEFICIAL aspects to high rates and high vacancy. If your building begins to experience high vacancy or its mortgage is soon coming due, you could have plenty of leverage to negotiate favorable lease terms. This assumes that the building owner wants to retain you as a tenant and you ‘re satisfied with the building and with renewing your lease.

If you are considering renewing your lease, or even if you are relocation, it is beneficial to understand the financial health of the property. The value of having a broker is not just with negotiating the lease, but also having the insider knowledge of the building’s ownership and overall health.

Partnering with CARMEN Commercial Real Estate means securing an advocate who is fully committed to your interests in the CRE market. Our expertise, combined with a tenant-focused approach, ensures that you navigate these challenging times with confidence and clarity. Reach out to us to discuss how we can support your real estate needs and help turn these market challenges into opportunities for your business.

letstalk@carmenrealestate.com