By SCOTT KIMBLER
As business models in major cities have changed in the post-Covid economy, Atlanta is holding its own as companies and commercial property owners rethink the modern workplace.
Many companies in the metro Atlanta area have altered the workplace to a hybrid model, a work-from-home model, or even a don’t come in at all model, and that is beginning to affect those in the business of commercial real estate ownership.
“There have been some delinquencies in the commercial mortgage industry,” said Sergio Garate, assistant professor in the practice of finance and director of the real estate program and Emory University’s Goizeta Business School. “Especially in the Atlanta area, there have been loan delinquents to levels we haven’t seen in a while. That is usually problematic for loan owners if their borrowers will not be able to make payments.”
He added that during the pandemic it was realized some of the work can be done at home. Not all of it, but a significant amount of people switched their positions from in-person to remote and in many cases, a hybrid work model.
“That will probably take us to a point where we realize not every job should go back to work,” Garate said. “From that standpoint, we have seen a significant amount of companies start to downsize their office space. That creates a challenge for building owners in order to find leases and absorb some of that space that is becoming available.”
Garate said every market has increasing delinquency rates but Atlanta has seen a large portion of loans in delinquency this year. Levels in 2019 were around 2% to 3%.
“We have seen levels increase in Atlanta,” Garate said. “To levels that are well above 10%. That is a significant increase in the delinquency rates. Which is not good for borrowers or lenders, but these are loans that tend to have significant restrictions. I would imagine they are kept from foreclosure. So people and lenders will be more flexible in understanding the changing conditions. They will be able to renegotiate certain conditions to allow their borrowers to make payments. Still, you can see there is a challenge in the industry we need to think about a bit more.”
Garate said property owners and lenders need to rethink the industry, not just in Atlanta, but in all markets. He feels repurposing of buildings can be a good thing and may address a few real estate issues on a few levels.
“As a whole, we do have some challenges in the supply of residential housing,” Garate said. “Residential space for workers and families, etc. So, if we find ourselves in a situation where there is space available in one property use, we will see entrepreneurs and investors start thinking about how to transform that empty space to its highest and best use. And the highest and best use would likely be residential. Hopefully, if we have a more dynamic economy and we allow transformation or ease of transformation, we can allocate space in a better way.”
Garate said such an idea could take a bit of time because of the challenges that may be found in transitioning a space from commercial to residential.
“But if there is a profit to be made, I am sure people will try to pursue that opportunity,” he said.
Julie Whelan, global head of occupier research for CBRE, agrees with Garate but also took a look at how the Southeast compares to other regions of the country.
“The real estate market, from an office perspective, is clearly challenged,” Whelan said. “Vacancy levels, which means unoccupied space, in portfolios across the United States is at a 30-year high. And that ranges from market to market.”
The largest markets have tended to be the most impacted due to the pandemic because there were organizations that left those areas and also organizations that did not have their employees come back at the same rate that they were before the pandemic, she said.
“Therefore, they were sitting with shadow vacancies and as leases have come up for expiration, there has been a general trend toward downsizing,” Whelan said.
Whelan was quick to point out that not all downturns or rethinking of space is a bad thing. She added that there are also ‘silver linings’ in the data.
“Generally, when you look at the office market as a whole, across the United States, you have still about two-thirds of the buildings that are more than 90% occupied. And that is not very far off from where we were before the pandemic. In the Sunbelt markets, there have been markets that have been resilient. They were high performers before the pandemic that continued to be high performers during the pandemic,” Whelan said.
She said what we are seeing right now is the groundwork for what will form future work trends.
“Although we know there are going to be challenges, we are optimistic in terms of not thinking that they are not going to be challenges that are an impediment to the economy or the overall banking system,” Whelan said.
The Biden-Harris administration has announced new actions to support the conversion of high-vacancy commercial buildings to residential use.
New financing, technical assistance, and the sale of federal properties are part of the initiative, which builds upon the White House Housing Supply Action Plan.
The Commercial to Residential Federal Resources Guidebook has over 20 federal programs across six federal agencies that can be used to support conversions. These programs include low-interest loans, loan guarantees, grants, and tax incentives, according to officials.
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