How commercial real estate has been affected by the pandemic. : The Indicator from Planet Money There's a fear radiating out from the commercial real estate market — a fear that some economists say could become a drag on any economic recovery. In fact, there's evidence it already has.
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Fear And Loaning

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Fear And Loaning

Fear And Loaning

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This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

ADRIAN MA, BYLINE: And I'm Adrian Ma.

VANEK SMITH: Adrian Ma, friend of the show, welcome back.

MA: Hello, hello.

VANEK SMITH: And you've been on many times before.

MA: Yeah.

VANEK SMITH: But for those who don't know, you are a business reporter at WBUR in Boston.

MA: Yup, yup.

VANEK SMITH: And you've come to us today with an indicator.

MA: That's right. I know you love nerding (ph) out on things like job numbers and market indexes.

VANEK SMITH: This is true.

MA: You have stats for days on this show.

VANEK SMITH: You know, it's in the name. It was unavoidable.

MA: Right. But this indicator comes from a source I think might be new to you and a lot of listeners, and it reveals an important unseen force that could be holding back the fragile economic recovery we're in right now.

VANEK SMITH: OK. I'm intrigued. What is it?

MA: It comes from something called the Senior Loan Officer Opinion Survey - initials, S-L-O-O-S.

VANEK SMITH: So the SLOOS, SLOOS (laughter).

MA: The SLOOS - yeah, exactly.

VANEK SMITH: And what is it exactly?

MA: So the Senior Loan Officer Opinion Survey is this report the Federal Reserve Bank puts out about every quarter. And one economist I spoke to says it's basically like a banker gut check.

JOE PEEK: Yeah. Yeah. You're basically asking them, hey, what does loan demand look like? And what are your lending standards right now? Have they tightened or loosened?

MA: That is Joe Peek. He works at the Federal Reserve Bank of Boston. And we were looking at the latest SLOOS together. In it, there are all these graphs that show essentially how loan officers and a lot of banks are worried, so they've tightened their lending standards, making it a little harder for customers to get home loans, car loans, credit cards. But there's one category of loans Joe is particularly concerned about - commercial real estate loans. At one point this past summer, about 80% of loan officers surveyed said they've tightened the credit spigot on these type of deals. And that is today's indicator - 80%.

VANEK SMITH: Eighty percent from the SLOOS.

MA: That's a lot, it seems like. I mean...

PEEK: Yeah.

MA: ...The last time you get that kind of - that spike is back in 2008.

PEEK: Right, the financial crisis - because do I want to lend to you right now on a real estate deal? Probably not - right? - because I'd be afraid that you're not going to be able to make the payments.

MA: Banks afraid to make loans on commercial real estate. Since the summer, data show banks have gotten even more cautious. And I don't know about you, Stacey, but I don't own any commercial real estate.

VANEK SMITH: Nope. Nope. Not - no, me neither (laughter).

MA: And yet there is a reason this should matter to you. This fear radiating from the commercial real estate sector - economists like Joe say it could turn this economic recovery into a years-long slog. And we'll explain how after the break.


MA: In normal times, Boston's financial district is a hive of activity - thousands of people working in offices, restaurants and retail shops buzzing through this canyon of glass and concrete buildings. But recently, I took a walk through the neighborhood. And Stacey, this is what it sounded like.

VANEK SMITH: Oh, that's not good.

MA: Yeah, mere silence. Minus a construction crew here and there, the streets were eerily quiet.

(Singing) Walking through downtown, walking through downtown, walking through downtown.

VANEK SMITH: Except for some errant singers (laughter).

MA: OK, except for that. That was me on my way to a little park tucked between the office towers. And that's where I met up with Liz Berthelette.

LIZ BERTHELETTE: Are we recording now?

MA: Yeah. Is that OK?


MA: Liz is a researcher at Newmark, a company that buys and sells commercial real estate. And she's been working in the area for years. So she's seen it change - companies moving in, vacancies going down and rents going up. She says the neighborhood had a vibe.

BERTHELETTE: It's the hustle and bustle. It's the people that work downtown. It's lunch meetings and, you know, industry events and meeting up with friends that work at other companies.

VANEK SMITH: Not so much hustle or bustle anymore. Since the pandemic, many companies have moved or have been trying to sublet their spaces. And now, according to Liz, office buildings in downtown Boston are only about 6% full.

MA: So if it's about 6% now, where would it usually be?

BERTHELETTE: Well, it's hard to say because we weren't really measuring that.

MA: Because in the before times, a company buying an office building in a super busy part of town might wonder how many square feet is it or what are the amenities, not, is anyone even going to show up?

VANEK SMITH: In cities around the country, the pandemic has been squeezing the market for commercial real estate - not just offices but also retail, entertainment and hotel space. And the empty streets and storefronts - those are just the effects that we can see.

MA: Yeah, there's a less visible impact - that fear rippling out from the commercial real estate sector. And to understand how that plays out, it may help to play pretend for a second. So Stacey, let's imagine we're back in pre-COVID times and you're a commercial landlord. You're - I don't know - Stacey Commercial Realty Corp.

VANEK SMITH: I prefer Vanek Smith Holdings, but go on.

MA: (Laughter) And let's say you own some commercial space downtown and you rent it out to clothing stores, restaurants and music clubs. And things are going well until the pandemic hits. And then a bunch of your tenants come to you and say, I don't know if I'm going to make rent this month or any time in the near future. So landlord Stacey, what do you do?

VANEK SMITH: Right. I mean, I could evict the businesses. But of course, I don't want to do that because, A, I'd feel really bad. But B, I mean, I'd have to find another tenant, and demand for downtown commercial space is not great right now. I could also try to cut a deal with the tenant, maybe temporarily reduce their rent until things get back to normal.

MA: Except that creates another problem. Let's say you took out loans to buy all that commercial space and now you've got payments coming due.

VANEK SMITH: Right. I mean, I could go to the bank and try to cut a deal with them, try to sweet talk them into maybe rolling over my loan or letting me delay payments a little bit.

MA: So that would be a great idea, except banks are not exactly eager to open up their wallets right now. Remember the SLOOS? There is still a ton of economic uncertainty.

PEEK: I think we probably haven't seen the worst of the bankruptcies and the business failures yet.

MA: That's Joe Peek from the Boston Fed again. He says the CARES Act from the spring made it easier for businesses and banks to defer loan payments for a while. But those measures are wearing off.

PEEK: We have a lot of loan delinquencies. A lot of those will turn into loan defaults, and some of those will turn into bankruptcies. So these businesses fail. So now banks have a problem.

MA: Banks see the market getting riskier, so they're a lot pickier about who they lend to or who they choose to give a break. And the problem is credit for a market is sort of like oil for an engine. You know, it sort of lubricates the economy. So if commercial landlords like Stacey Corp. can't get loans, they're less able to cut deals with tenants and help them get through the pandemic.

PEEK: OK. Hotels go bankrupt or retail stores go bankrupt. But that's not where the bankruptcies end because many of those employees have lost jobs. They're going to cut back their spending at all kinds of stores. And so that's going to make those stores struggle.

VANEK SMITH: Which I imagine will make the banks tighten up even more.

MA: You got it. The cycle continues. And the commercial real estate market becomes like an anchor dragging down the rest of the economy.

VANEK SMITH: So Adrian, this is a very sobering indicator that you've brought to us. Is there some light at the end of this tunnel? Is there a way out of this cycle?

MA: Well, Liz Berthelette, the researcher from Newmark - she says a turnaround ultimately depends on people getting out there.

BERTHELETTE: At the end of the day, demand for commercial real estate or real estate in general is really all about the people - where they want to live, where they want to work, how they want to spend their money.

MA: And even with a vaccine on the way, it'll be a while until people can do that like they used to.


VANEK SMITH: This episode of THE INDICATOR was produced by Brittany Cronin, fact-checked by Sean Saldana. THE INDICATOR is edited by Paddy Hirsch and is a production of NPR.


MA: (Singing) Walking through downtown, walking through...

VANEK SMITH: (Singing) Walking through downtown.

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