Range of Data Illustrates Turmoil in Commercial Real Estate

It’s no big secret that inflation has created financial stress in households and businesses this year. A new report from Alignable illustrates just how much trouble small businesses are having meeting their monthly obligations. But small businesses are not the only ones suffering. Commercial real estate operators are feeling the pinch as well.

Alignable’s April Small Business Rent Report, released last week, found that 39% of small-business owners across the U.S. are behind on rent. This is one percentage point higher than in March. And it is up nine percentage points from January’s 30% figure. 

According to Alignable, “Much of this data is based on an Alignable Rent Poll conducted among 4,205 randomly selected small business owners from 4/1/23 to 4/26/23. Other insights came from past surveys taken over the past year and a half among 75,000+ additional respondents.”

Source: Alignable’s April Small Business Rent Report

Alignable lays the blame for the situation, at least in part, on steadily rising rents.

“The reasons for the increased rent delinquency include a steady lift in the amount of rent small businesses must now pay,” Alignable said in its release announcing the alarming figures. 

For example, Alignable found that in January, 47% of small business owners reported paying higher rents compared with six months earlier. That figure had climbed to 53% by April. 

Bad for Landlords Too

These figures offer yet another illustration of how tough things are for many SMBs right now. It’s also not exactly great news for commercial real estate operators who are collecting rent. Or at least trying to. 

We all know the pandemic and the emergence of remote work as the rule rather than the exception have been major drivers of a growing crisis in commercial real estate. 

It was also a topic of discussion at Localogy’s recent L23 conference. There, we heard Roam founder Howard Lerman recount his own pandemic commercial real estate woes while he was the CEO of Yext. And why he is using this realignment in how we work (into what he calls “distributed work”) as the foundation for his new company.

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The Alignable data reflect stresses SMBs are feeling across all types of commercial real estate, from offices to restaurants to strip malls. 

The latest data on office occupancy rates helps illustrate the bigger challenges facing commercial real estate. 

Data from CRE software firm CommercialEdge’s April National Office Report helps illustrate the state of office occupancy rates, rental rates, and more. 

According to the CommerciaEdge data, the national office vacancy rate stood at 16.7% in Q1 this year. That is a 20 basis point rise over the same period last year. 

The CommercialEdge report cites multiple headwinds facing the office market, including rising interest rates, plummeting demand, and looming loan maturities. 

The report also details the state of the office market city by city. The report cites Brooklyn, Austin, and Houston as among the markets with the highest vacancy rates. Houston’s is a staggering 23.4%. Meanwhile, San Francisco, seen as ground zero for downtowns decimated by remote work, has a 19.1% vacancy rate. 

Live Where You Work

One trend CommercialEdge expects to see accelerate is the conversion of office buildings into residential ones. Especially given the much higher demand today for residential vs commercial real estate. 

This idea has previously been met with skepticism. The conventional wisdom has been that it is too difficult to convert offices into residences, based on the different ways each type of building is constructed. 

CommercialEdge says these concerns are beginning to fade. And it shares a number of examples of projects where big city office towers are being converted into apartment buildings.

For example, it says five buildings in Dallas are being converted, adding an estimated 1,500 residential units to that market over the next few years. In Midtown Manhattan, the McGraw-Hill building will convert more than 20 floors into apartments. That project is said to begin this summer. 

The report says conversions are also becoming a big thing in Washington, D.C. There a reported 2.5 million square feet have reportedly been marked for conversion to residential. 

“As a larger portion of the existing office space becomes functionally obsolete, the idea of converting these spaces into residential is going to be more prevalent as conversions look to be a more viable option than initially thought,” said CommercialEdge Senior Manager Peter Kolaczynski.

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