The Platform


Cities are unprepared for the commercial real estate crash that’s on the horizon.

The first tsunami in commercial real estate was caused by the pandemic and has already hit many cities in the form of increased vacancy rates in commercial buildings. The second tsunami is out on the horizon waiting for the right moment to crash ashore making an even larger impact on the overall national economy.

The first tsunami was the crash of corporate leasing in commercial buildings across the country causing vacancy rates to rise to double digits. Most property management firms as well as building owners did not see it coming. They also did not heed the series of direct warnings clearly posted in this publication since 2020. They could have done something to protect themselves from this tsunami but instead, relied on the wrong experts who thought the economy would coast back to business as usual. When it started to hit one city and then another, some still thought it would just pass and not hit their area. Now, many of them think they have survived this tsunami and want a government bailout to make them whole again.

Across the country from San Francisco to New York and in between in places like Chicago, Denver, Houston and Austin, commercial real estate owners are feeling the effects of this real tsunami which caused vacancy rates to surge. These rates will never go back to pre-pandemic levels. It has caused what I call the “reverse of musical chairs” within corporate leasing, where more and more commercial space becomes available as less and less demand weakens the market, due to many corporate tenants reducing the number of employees who work out of the office. Remote jobs are becoming permanent and that translates to fewer commuters coming to downtown areas requiring office space.

Just like a tsunami during inclement weather, after one hit, you need to be very aware that there could be a second one on the horizon. In this case in commercial properties, there is.

It’s time for them to spend money to make money by attracting the remains of the market. They can also do nothing and if they continue to avoid the growing reality of less demand, their buildings will go further underwater, and they will not recover after the next surge.

The second tsunami will be a deluge of debt to regional banks that have holdings in commercial real estate that fail to measure up to their previous appraisals. This is already happening. Some buildings’ values, due to lower occupancy rates, are being swept away in their rating by 25% less than their original appraised value. Banks need to be aware of this next tsunami as well.

Banks will begin to feel the surge of the tsunami as more buildings lose corporate tenants and then fail to attract those firms who are still looking for leased space. Vacancy rates will increase in some buildings.

With more choices available, corporate tenants are not going to be found working in those buildings with substandard amenities. They will migrate to buildings offering 21st-century amenities. Those buildings may not even be in the same physical location as some companies re-evaluate what their current location offers compared to a city within the Sunbelt states.

“Commercial buildings need to add real value to their intelligent amenity offerings if they want to retain and attract corporate tenants,” observes Darrin Mylet, CEO of Telosa Networks of Miami, which provides practical solutions like wireless fiber with super gigabit speeds. “Building owners must stay away from solutions that do not add value or cut operating expenses.”

He is right. Whimsical applications are being peddled as green energy initiatives or energy-saving applications which sound great until you do a good analysis and find out it is a 35-year payback, or it does not make any real payback, it just sounds good for the environment. No commercial building owner or property manager should be buying off these feel-good applications because they will not save them from the surge of the tsunami.

Buildings cannot all be repurposed as some pseudo-experts have suggested. Money is better spent on making intelligent amenities, like power and broadband connectivity services, redundant and resilient.

The second tsunami is coming. You can take that to the bank. Realistically, the second tsunami will be delivering itself to the banks and their pseudo-experts on finance will be myopically saying “Surf’s up,” instead of, “Run for your lives.”

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.