The impending collapse facing the commercial real estate market could be even worse than the mortgage collapse that hit the global economy just 15 years ago.
or not.
At this point, the extent and nature of the decline in the domestic commercial real estate market, particularly office buildings, remains entirely a matter of speculation.
Bears and bulls agree: Low occupancy rates in office buildings, business parks and other professional facilities will create economic problems if commercial leases don't get renewed, as they have in major cities like San Francisco, Chicago and New York.
But where does South Carolina fit into all of this? Well, quite a bit, says Lily Shen, a finance professor at Clemson University and visiting scholar at the Federal Reserve Bank of Atlanta.
“I'm not worried about commercial real estate in this region,” Shen said. “One of the perks of living in the South is that whenever you hear a horror story in the media, it's always New York, San Francisco or Chicago. It's a national concern because that's where the majority of commercial real estate is located.” [is]But traditionally, we have a lot of agriculture and manufacturing jobs, so that's not a big concern. [locally].”
Throughout this century, big American cities built huge office buildings to provide space for workers, and when times were good for office-building owners, occupancy rates were high.
However, COVID-19 has completely changed that trend, causing a rapid shift to remote and hybrid work.
Imagine working in a city like New York and your salary doesn't allow you to live close to the office, but you find out you can do your job from home while still getting your work done. How much time would you save commuting by train, subway, or bus? How much money would you save?
And if you can work for a company headquartered in Manhattan from your home in Connecticut or New Jersey, how long will it take for you to realize that you can also work for a much lower wage from your home in Georgia, Mississippi or South Carolina?
That has dissipated enthusiasm for returning to the office full-time during the pandemic, leaving office space in big, expensive cities empty as nearly 1 billion square feet of U.S. office space leases are set to expire.
So the collapse of commercial real estate in big cities is sure to have some impact on the overall economy. But what helps protect South Carolina in particular is that the region hasn't rushed to build a ton of office buildings, so it doesn't have as much office space to lose, says Allen Wilkerson, a commercial real estate expert at Colliers in Columbia.
Part of the reason is that real estate development has lagged far behind the influx of migrants into the state.
“The way we've built over the last decade has worked in our favor,” Wilkerson says. “Sometimes I think, 'Oh, I wish we had more,' but now I think, 'I'm so glad we didn't build too much.'”
And in the state's metro areas where we've built, like Greenville and Columbia, occupancy rates are much higher than the national average.
“Nationally, the vacancy rate for commercial real estate is about 20 percent,” Shen says, “but Columbia's vacancy rate is 8 percent. What about Greenville? It's 11 percent.”
For comparison, 12 percent vacancy rate for office space is a healthy market standard.
Another buffer against South Carolina’s unique commercial real estate collapse is that its office-heavy cities have successfully avoided the potentially damaging effects of issues like cross-collateralization and subleasing, Wilkerson said.
Cross-collateralization means that a building in one market is part of a larger portfolio that includes buildings in other markets, such as San Francisco, meaning that if both markets are tied to the same ownership or investment portfolio, problems in the San Francisco office market will have a significant impact on the Myrtle Beach market.
Subletting?
“Sublease space is also a market pull,” Wilkerson says. “You're competing with what's on the market from a direct vacancy standpoint. So if I own a building and I'm looking to rent space, and someone else who's a tenant in the same building wants to sublease space, they can say, 'Rent me your space, and I'll sublease it for 60 percent of the market value for that building.'”
The advantage for South Carolina, he said, is that many cities, particularly Columbia, have been able to eliminate subleasing.
He added that most office buildings are also nearly full.