The current COVID-19-induced crisis is unlike any other the real estate industry has experienced. The effects are wide-ranging and causing massive disruption to daily lives, loss of life and shutdown of businesses, including commercial real estate. How are the real estate markets of Boston, New York, New Jersey, and Washington, D.C. faring?
Past Experience Leaves Clues
All agree that there are no parallels between this current economic challenge and past ones. The deliberate and intentional shutdown of our local economies is unprecedented. However, it’s worthwhile to look at past experience for the sake of comparison.
Rents in Boston have historically fallen by 32% on average in the past three downturns, dating back to the savings and loan crisis from the ’80s to the early-’90s. During and after the past recessions, Boston’s rents also took time to hit bottom, a period that has lasted up to four years. Manhattan, during the dotcom bust, had massive declines in leasing volume and surges in the sublease and overall availability rate. New York’s. rents also fell by more than one-fourth in the tech bust and more than one-third in in the Great Recession. In previous recessions, Washington, D.C. suffered sharp declines in absorption and spikes in vacancy due to construction, particularly in the dotcom bust. In the Great Recession, however, the D.C. market was counter-cyclical and was not hit as hard, thanks to its reliance on government and contractors. In New Jersey during that recession, the office market’s vacancies rose from 2007 to 2013, while its industrial market leasing collapsed by nearly 25% and didn’t rebound to normal velocity until 2010 and 2011. However, in each of these markets, the economic make-up has changed and broadened, which creates more resiliency for them today than in past cycles.
Impact on Northeast Markets to Date
Each market has enacted government policy in order to protect human life, including shuttering schools and nonessential business, encouraging or enforcing shelter-in-place orders, and passing laws to encourage business loans and allow for rent relief. The Northeast has been one of the most affected areas in the United States in numbers of total cases and deaths. But while commercial real estate deals in Boston are still getting done, they are generally expiration-driven, or were near the finish line at the outset of the pandemic. In New York, leasing declined 50% quarter over quarter. In New Jersey, the impact on the industrial market has been from short-term supply chain disruptions. In response, the Federal Maritime Commission is working on initiatives to prevent cargo disruptions and keep supply chains fluid, as many nonessential retailers and manufactures are shut down due to COVID-related restrictions. Washington, D.C. technology companies are in a holding pattern, while government contractors there seem the least affected at the moment. Contracts are still coming up, and due to the sensitivity of some of the work, leasing may continue in this sector.
The Burning Questions
This event is unprecedented in our lifetimes, so tenants, landlords and capital sources are all figuring out how to deal with it together. Questions on rent relief, abatement, deferral, modification of terms — such as adding term to the end of a lease to counter a free-rent ask up-front — are occurring across markets. With the complete construction shutdown in some markets, planned tenant moves into new space in the next few weeks and months will be delayed, and if their current space is spoken for, tenants will need to find alternative space. The future viability of coworking is on a lot of clients’ minds, as is force majeure, the clause that allows contracts to be broken in the case of unexpected events. Since each such clause is unique, it’s still unclear how these clauses will affect individual contracts.
We have confidence in the Northeast market’s ability to come out of this downturn with strength. Remember that prior to this crisis, fundamentals were generally strong. However, there are likely to be long-term changes to our markets as a result of this massive work-from-home experiment the United States is testing. Work from home is likely to become more commonplace for a select number of people and an important employee perk. Other changes stemming from the pandemic? Space per employee could grow, in a shift away from the densification of recent years, while new technology could register alerts about people inside buildings who are showing symptoms of being ill. The effects of offshore supply chains will undoubtedly be reconsidered.
About the Authors:
Aaron Jodka, Managing Director, Research & Client Services | Boston
John Obeid, Senior Director | New Jersey Research
Miles Rodnan, Senior Research Analyst | D.C. Metro Region
Franklin Wallach, Senior Managing Director | New York Research