The impending collapse that the commercial real estate market is facing could be worse than the residential mortgage crash that pummeled the global economy a mere 15 years ago.
Or not.
At the moment, the extent and nature of a downswing in the country’s commercial real estate markets – particularly office buildings – are entirely speculative.
What is agreed upon by bear and bull alike is that low occupancy rates in office buildings, business parks, and other professional sites will lead to some economic trouble if commercial leases are not renewed – which they are not being in large cities like San Francisco, Chicago, and New York.
But where does South Carolina fit into all of this? Lily Shen, a professor of finance at Clemson University and a visiting scholar at the Federal Reserve Bank of Atlanta, says, pretty well, actually.
“I’m not concerned about commercial real estate in our area,” Shen says. “One blessing of living in the South is, every time we hear a horror story on the media, it’s more about New York City, San Francisco, Chicago. They make it a nationwide concern because that’s where the majority of commercial real estate [is]. But traditionally, we’re more farming, manufacturing jobs, so it’s not too big of a concern [locally].”
When large U.S. cities built space for workers over the course of this century, they built large office buildings. When times were good for office building owners, occupancy rates were high.
COVID-19, however, upended the dynamic by triggering a rush to remote and hybrid work.
So imagine working in a city like New York, where wages would likely not allow you to live close to the office, and you found out you could work from home and still do your job. How much time traveling to work on trains and subways and buses might you save? How much money?
And if you can work for a Manhattan-based company from your home in Connecticut or New Jersey, how long would it take you to realize that you could work from your home in Georgia or Mississippi or South Carolina for a lot less?
So the motivation to go back to the office full-time evaporated over the course of the pandemic, leaving office space in large, expensive-to-live-in cities vacant, just as a almost a billion square feet of U.S. office space leases are about to expire.
So a collapse in major-city commercial real estate would certainly have some effect on the overall economy. But what will help insulate South Carolina in particular, says Allen Wilkerson, a commercial real state expert at Colliers in Columbia, is that there never was a rush to put up a lot of office buildings here, so there aren’t many office spaces to lose.
Part of this is due to the fact that real estate development has been a lot slower here than the influx of people moving to the state.
“The way in which we’ve gone about construction over the last decade here has been in our favor,” Wilkerson says. “Sometimes you say, ‘Gosh, I wish we had more,’ and now you say, ‘I sure am glad we didn’t overbuild.’”
And where we have built, in the state’s larger metros like Greenville or Columbia, occupancy rates are much higher than national averages.
“If we look at nationwide commercial real estate vacancy, it’s about 20 percent,” Shen says. “But what’s the vacancy we have in Columbia? Eight percent. How about Greenville? Eleven percent.”
Twelve percent is a healthy market norm for office space vacancy, by the way.
One other buffer against a commercial real estate meltdown specific to South Carolina, Wilkerson says, is that office-heavy cities have managed to skirt the potentially harmful effects from issues like cross-collateralization and subleasing.
Cross-collateralization means a building in one market is part of a larger portfolio that includes buildings in other markets – like, say, San Francisco. Meaning, a problem in the San Francisco office market would have a greater effect on the Myrtle Beach market, if both markets were tied to the same ownership or investment portfolio.
And subleasing?
“Sublease space kind of drags a market too,” Wilkerson says. “It competes with what’s on the market from a direct vacancy standpoint. So, if I own the building and I’m trying to lease space, but somebody else in my building who’s a tenant of mine wants to sublease their space, they can just say, ‘Hey, take the space and I’ll sublease it to you at 60 percent of whatever the market rate for the building is.’”
He says South Carolina’s advantage is that a lot of cities – notably Columbia – have managed to do away with subleases.
He added that most office buildings are also mostly occupied.
