Coronavirus fallout: Is commercial real estate headed for a crash? | Business

SAN DIEGO, Calif. — Within the next week, David Marino will list nearly 300,000 square feet of sublease office space in San Diego’s Sorrento Mesa neighborhood that current tenants no longer need.

For Marino, a principal at the Hughes Marino commercial real estate brokerage firm that specializes in representing tenants, these subleases are an early wave of what he expects to be a tsunami of unwanted office space flooding the market in coming months in the wake of COVID-19 shutdowns.

Social distancing, plunging revenue and layoffs already have wreaked havoc on certain commercial real estate sectors, such as hotels, malls, movie theaters and non-essential retail.

Office space could be next.

“Most companies have now realized that they can work as effectively remotely, and some employees actually like it,” said Marino. “Office tenants contemplating their future requirements are going to be leasing less space than they have now.”

That could create ballooning supply starting this summer — a surplus that might make the Tech Wreck of 2000 and the Great Recession of 2008-09 “look like a rounding error,” said Marino.

“This is going to be much more like the early 1990s when we had the savings and loan crisis and over-development of office buildings and foreclosures,” he said.

As a tenant representative, it’s in Hughes Marino’s interest to portray the market as favoring tenants, though Marino insists he has no ill will toward landlords.

But in March his firm raised eyebrows among building owners when it sent out an email offering to help companies restructure leases as rents “collapse” amid the pandemic.

That decline hasn’t shown up in the numbers yet. Real estate investment trusts that own office buildings nationwide are still collecting roughly 90% of rent from tenants — even though employees are largely working from home.

“When you look at the overall collection rate for office, it has been really strong,” said David Rodgers, senior research analyst with RW Baird. “That to me is fairly logical. Office tenants, particularly those in high-quality buildings, they put a lot of money into that space. That is home base for their operations.”

According to Rodgers, the key question is how many office jobs will evaporate permanently during a recession sparked by the pandemic, and how many companies will shift a majority of their employees to remote work.

“I think what you are likely to see is businesses [that are struggling] will likely go to work-from-home because it is more efficient,” he said. “Others will take more space. It comes down to how many jobs are going to be lost.”

While it’s still in the early innings, there are signs that employers are embracing remote work across a…

Read MoreCoronavirus fallout: Is commercial real estate headed for a crash? | Business

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