Partner at Holden Legal Group, a NJ and NYC law firm focused on business and real estate law.
As we head into 2021, the commercial real estate landscape is shifting. The trends and demands on commercial real estate owners are different depending on whether the property is located in an urban or suburban area.
Looking ahead, commercial real estate may get a boost due to government subsidies in the form of government aid to states through direct funding support and new government infrastructure projects that create jobs and contracts.
Direct Government Support
Currently, state budgets have a deficit for two reasons. First, they do not have tax revenue flowing in from individuals who are unemployed. Unemployed individuals do not spend money that they do not have. Second, state budgets have a deficit as a result of commercial real estate owners because they are unable to collect from their tenants who have been hit hard during the pandemic.
These tenants have requested rent concessions and/or forbearance agreements until they begin to generate more revenue to pay their bills. Examples of these types of real estate owners include malls, shopping centers and office buildings that are composed of tenants who are not operating at full capacity. Based on these circumstances, rent is not fully collectible.
Additionally, commercial real estate owners have asked their lenders and, in some cases, the municipal and state tax authorities for concessions or forbearance. Unfortunately, if the consumer is not spending at the local level, then the commercial real estate owner is not receiving it in the form of rent. Therefore, as the cycle suggests, the state cannot collect its tax revenue from commercial real estate owners.
In 2021, the Biden administration will have an opportunity to provide increased stimulus to individuals and states that require assistance due to the havoc created by the pandemic. This means that individuals may receive aid that is desperately needed to help support those who are currently unemployed as well as business owners who need another round of PPP money if their business is still struggling.
Business owners who have been unable to pay rent and have negotiated forbearance agreements with commercial landlords may be able to pay rent arrearages due to the federal government’s infusion of support. This would ease the burden on commercial real estate owners because collections would afford commercial landlords the opportunity to pay their own creditors — namely, municipal, state and federal governments — the taxes that are owed. Due to newfound aid from the federal government, states would not look to commercial real estate owners to fill the gap.
Moreover, the Biden administration may carve out direct stimulus payouts for each state. This would mean that there could be a federal bailout for the states and their respective deficits. If a state had a budget deficit of $200 million, then the federal government could provide either a portion of that $200 million or the entire sum, which would act as a backstop from the federal government. As a result, the state would not need to lean on the commercial real estate owner to fill the gap. This could allow commercial real estate owners to become more flexible with their tenants and ease some burden as the pandemic lingers.
Biden’s New Deal And Commercial Real Estate’s New Age
Biden can use this moment to put America back to work. Some may politicize him as the second coming of FDR with the argument that he is attempting to copy the “New Deal.” We may hear about new infrastructure initiatives meant to rebuild America’s crumbling infrastructure, but Biden’s sole intention will likely be to drive down unemployment. This will be music to the ears of business owners and commercial real estate owners because it will mean the federal government will be spending an exorbitant amount of money in various parts of our country. Contracts will be awarded to vendors to rebuild roads, bridges, tunnels, subways and other crumbling parts of our transit systems.
As an example of a business owner who will embrace this type of government spending, a local deli in a shopping center will be thrilled that the government is awarding these contracts. As contractors work on nearby roads and bridges, they may receive increased walk-in business from the workers at these local construction sites, which will increase business. In turn, this will assist the local deli in paying its bills. The shopping center owner will be equally pleased because it will receive its rent on time and increased foot traffic for its other in-line tenants at its shopping center.
Keep an eye on trends as 2021 moves along so you can position yourself and your business for success.
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