Commercial Rent Collections to Suffer in 2021: Deloitte

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The lion’s share of the North American commercial real estate owners surveyed for Deloitte’s 2021 Commercial Real Estate Outlook expect rental declines possibly approaching 40 percent, while fewer than one-third anticipate rent collections falling by 10 percent or less over the next 12 months. 

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From April to July earlier this year, Deloitte reports, average rent collections were above 90 percent for industrial, office, multifamily and health-care REITs. Rent collections for U.S. shopping center REITs dropped to 50 percent in April, yet recovered to 80 percent in August.

Nonetheless, operating margins in some sectors are being hammered by higher costs for tenant improvements and leasing commissions. In the second quarter, office owners in top U.S. markets saw an average decrease in net effective office rents of 6.6 percent year over year, largely driven by tenant concessions.

Average funds from operations fell 29.3 percent year-over-year and net operating income dropped 15.6 percent year-over-year for public REITs in the second quarter.

Still, there were bright spots. Industrial properties and data centers experienced year-over-year funds from operations growth of 11.2 percent and 18.1 percent, respectively, in the second quarter.

“The pandemic is disrupting the value proposition of commercial real estate, especially for offices, retail, and hotels, causing most commercial real estate companies to reevaluate existing portfolios,” the report states.  

Crisis and response

On the technology front, Deloitte’s outlook notes “growing cybersecurity and data privacy concerns” among survey respondents, as cyberthreats increase in sophistication, potentially exposing commercial real estate companies to breaches of their own or tenants’ data or to ransomware attacks.  

But a more structural upheaval could be developing. Based on this survey and on another, larger survey, Deloitte warns: “Increasingly, offices will be reserved for face-to-face interactions and team-based activities … while employees would continue to work remotely for more individualized tasks and assignments.”

Given these and other pressures, the outlook reports that over the next 12 months, many commercial real estate companies plan to cut operating costs by reducing discretionary spending. Since the start of the pandemic, more than half of survey respondents have reduced employee compensation, frozen promotions, or resorted to furloughs and layoffs to lower their workforce-related expenses, according to Deloitte.  

The Deloitte outlook is based on a recent survey of 800 senior financial services executives across various industries. Included in that group were 200 senior commercial real estate executives, all representing companies with at least $100 million in assets under management in 2019. Nearly one-third had more than $10 billion in AUM.  

Read the full report by Deloitte.