China’s office market, meanwhile, was being hit by plunging rents and high vacancy rates amid slower economic growth even before the coronavirus. Office vacancies in Shanghai, China’s financial heart, may climb to 28% next year, according to Colliers International Group Inc.
Shares of U.S. real estate investment trusts, particularly those that own malls, have been hammered. Brookfield Property Partners LP, which made a big bet on malls with its $15 billion acquisition of GGP Inc. in 2018, expects its tenants to face “severe consequences” in coming weeks with substantial parts of the economy shut down.
Chief Executive Officer Brian Kingston sent a letter to shareholders on Friday noting the firm has $6 billion in undrawn credit lines and cash on hand.
“From a corporate liquidity perspective, we are in good shape,” he said. “We expect this will be more than sufficient to weather a protracted downturn.”
Companies such as Hilton Worldwide Holdings Inc. and Caesars Entertainment Corp. have been tapping backup loans to shore up their finances. The sudden threat to tenants that pay rent is an unwelcome shock for office and warehouse landlords. For retail and hospitality property owners, it could be fatal.
“The implications could be far-reaching, but quantifying these is highly speculative at present,” said Matthew Saperia, an analyst at Peel Hunt.
With so much uncertainty, the availability of credit is shrinking. New financing for hotels, malls and senior living has mostly disappeared. And debt that’s reliant on income from building tenants is suddenly very risky.
As much as 15% of loans on commercial property could default over the next couple of years if there’s a recession, according to Mark Fogel, CEO of Acres Capital, a private commercial real estate lender.
Large commercial lenders such as Blackstone Mortgage Trust Inc. and Arbor Realty Trust Inc. have seen their stocks plummet during the virus-fueled market turmoil.
“Nobody knows where deals will be priced and nobody knows just how long this issue is going to affect the world and how much it’ll affect the underlying collateral,” Fogel said.