Real estate prices in hip US cities have already multiplied again in recent years. However, a new real estate crisis could not come from the residential real estate market this time, but even more quickly from the commercial real estate market. No country has more retail space per capita than the USA. And the first major tenants have already announced to their landlords that they will unilaterally cut rents or stop payments altogether. Landlords are heading for a veritable crisis here within a few weeks.
In the USA, 2.2 square meters of retail space are available for every inhabitant. In Germany, depending on the source, the figure is only 0.2 to 1.45 square meters, and in the United Kingdom it is only 0.4 to 0.7 square meters. There are no known supply bottlenecks in the UK and in Germany due to insufficient retail space. Therefore, we can assume that a nationwide supply for the population with all conceivable consumer products would also be possible with one third of the space currently used in the USA. This gives the US retailers, who are now under enormous pressure, some negotiating power.
Property crisis on the horizon? Major tenants exerting pressure on landlords of commercial real estate
Chains like Subway and Mattress Firm have already contacted their landlords in the past few days. While Subway flatly announced that they would delay or reduce rental payments starting in April, Mattress Firm politely offered to extend the leases in exchange for reduced rents. In a second letter, in the absence of a response from the landlords, the company threatened to invoke the force majeure clause in the leases and suspend rent payments altogether.
Have the landlords taken out insurance against force majeure and the insurers consider the closure of the business forced by the state to be such a case of force majeure? In the wake of the looming real estate crisis, the landlords might even prefer that the tenants suspend their payments. Because then the insurance company would have to step in until the tenants pay again. This would only shift the problem to a different level of the economy, which might be better able to cope with these burdens than the landlords.
The UK, a new law has therefore already been introduced that prohibits landlords of commercial property from using coercive measures against defaulting tenants for a period of three months. In return, tenants remain liable for unpaid rent and have to pay it later. Berlin, on the other hand, only comparable protection for tenants of residential property has been introduced so far. In Germany, too, landlords are already reporting that important commercial tenants are putting pressure on them. A regulation comparable to the British law is to be followed at the federal level.
A cascade of credit defaults in the USA, up to bank bankruptcies, is threatening
So far, only tenants are protected, whereas the legislator assumes that landlords would not have any problems with missing rents. But this is not the case. Those who calculated that the monthly rents would cover the repayment instalments of the loan now have a problem. This affects small private landlords with a single flat just as much as large landlords with huge shopping centres. In the best case, the lack of repayments merely reduces the creditworthiness. That makes it more expensive or impossible to take out new loans later. In the worst case, if the payment default lasts longer and cannot be absorbed by the landlord from his own funds, the landlord loses his property to the bank.
Given the sheer volume of commercial real estate in the USA, this problem is likely to arise there first. After all, many commercial real estate lessors were not particularly well positioned even before the crisis. Due to the low interest rates on short-term loans, many investment companies have made the cardinal mistake of financing long-term assets with short-term loans. Now banks will pay very close attention to the solvency of borrowers when refinancing. Failure to pay rent is likely to make it impossible to grant new loans. The investment company would become insolvent.
Property investor Tom Barrack is already warning of a domino effect. If the first major real estate companies were to go bankrupt, the remaining ones would find it all the more difficult to obtain follow-up financing for expiring loans at reasonable conditions or at all. The consequences could even extend to bank bankruptcies. A new real estate crisis threatens!