Daily life in Boston’s Financial District used to be dominated by the hectic pace of office workers, lunch meetings, industry events and after-work meetings.

“Downtown Boston has really developed in the last few years,” said Liz Berthellete, a researcher with commercial real estate broker Newmark. “And before the pandemic, we had the strongest fundamentals this market has ever seen.”

Berthelette worked in the Financial District for over a decade and saw this growth for herself: companies moved in, rents rose, and in early 2020 the office vacancy rate was around 7% – a near all-time low, she said.

Much has changed within a few months. One weekday afternoon, the canyons of concrete and glass office towers that once buzzed with activity felt an eerie calm.

Several months into the pandemic began, many companies cleared their rented offices, pushing the vacancy rate to a seven-year high of over 10% in downtown Boston and 13.5% in the metropolitan area, according to a recent Newmark report.

Retail space for rent on State Street in the Financial District. (Jesse Costa / WBUR)

There are now many remaining office tenants try to sublet their space. At the end of October, around 3.8 million square feet of office space was available for sublet in downtown Boston, Back Bay, and the Seaport – roughly double what it was after the Great Recession of 2008 and the dot-com bust of the early 2000s.

Since most of the former office residents work from home, the daily occupancy rate in the office buildings in the city center is only around 6-10%, according to the commercial real estate experts surveyed by WBUR. How does that number compare to “Before Times”?

“Well, it’s harder to say because we didn’t really measure that,” said Berthelette. In “normal times” a buyer looking for downtown office space can ask a realtor about square feet or amenities. Nowadays they also want to know – is someone coming?

Before the pandemic, the market for office space in the Boston Metro was in high demand, rents rose and vacancies fell. (Courtesy Newmark)

Commercial landlords and potential tenants in the hotel, catering and retail sectors are also asking themselves this question. And as the pandemic spreads, and these companies are bleeding revenue to the ground, some economists fear the impact could extend well beyond commercial real estate and slow any possible recovery from the recession caused by the pandemic.

About a mile west of the Financial District, amid the high-end shops and restaurants of Newbury Street, the scene is a little livelier. Small groups of people dined al fresco on a gusty afternoon and shoppers flocked in and out of stores – at least those who let in customers.

However, a closer look showed just how much the area’s retail space had been hampered by the pandemic. “For Lease” signs hang in the windows of dozens of empty storefronts. Many of the stores look like they’ve been cleared out in the past few months.

Signs advertising available retail space have become more common on Newbury Street in Boston since the beginning of the pandemic.  (Jesse Costa / WBUR)Signs advertising available retail space have become more common on Newbury Street in Boston since the beginning of the pandemic. (Jesse Costa / WBUR)

“It’s not your imagination,” said Ann Ehrhart of Boston Urban Partners, a commercial real estate company specializing in restaurant and retail space. The decline in local customers, office workers, students and tourists has taken the greatest toll on urban shopping and dining destinations, she said.

“It’s not just the number of seats available, but the number of high-quality seats available,” said Ehrhart.

The retail property market has already been declining in recent years: lower rents, fewer deals, more vacancies. The pandemic has accelerated this trend. And since brick and mortar stores only generate a fraction of their normal turnover, many companies do not take the opportunity to open a store.

“Although there are some bright spots when it comes to people getting creative to think about deals,” said Ehrhart, “I would honestly say, on the whole, it’s pretty bleak right now.”

Fear and credit

Even if you’re not buying, selling, or leasing commercial real estate, there is a good reason to worry about what happens to that part of the economy, said Joe Peek, an economist with the Federal Reserve Bank of Boston.

As the economic impetus weakened by the federal CARES Act, he expects people’s incomes to fall and more businesses to stall.

“I think we haven’t seen the worst bankruptcies and business failures,” said Peek. And what happens next has ramifications for the rest of the economy.

It starts like this: companies fail, they fail to pay their loans, and banks start to take losses. Then, when the banks see the market getting riskier, they become more selective about who to lend to.

According to a recent edition of the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS), 60-80% of loan officers said they had tightened lending standards for commercial real estate projects in recent months. The last time SLOOS saw a similar credit crunch was around 2008, during the height of the Great Recession.

“Do I want to loan you a home loan now?” Peek said. “Probably not. Because I’m afraid you won’t make the payments.”

A Federal Reserve poll shows a dramatic increase in the number of senior loan officers who say they tightened their commercial home loan standards during the pandemic.  The last time a similar surge was seen was during the Great Recession.  (Courtesy of the Federal Reserve)A Federal Reserve poll shows a dramatic increase in the number of senior loan officers who say they tightened their commercial home loan standards during the pandemic. The last time a similar surge was seen was during the Great Recession. (Courtesy of the Federal Reserve)

The problem is that credit for a market is like oil for an engine: “It lubricates the economy,” Peek said.

Unless commercial landlords get loans, they are less able to enter into contracts with tenants to help them through the pandemic. And the could lead to further business failures.

“Okay, hotels go bankrupt or retail stores go bankrupt. But bankruptcies don’t end there because many of these employees have lost their jobs. They will struggle to cut their spending in all sorts of businesses, “Peek said, which could lead banks to tighten lending even further.

Economists like Peek and his colleague, Boston Fed President Eric Rosengren, fear this cycle could severely affect a potential post-pandemic Restoration.

So how do we get out of there?

Commercial real estate depends on people being out there – working, traveling, shopping, eating out. But we can’t really do that, Peek insists, until the pandemic is under control.

Various measures show how the pandemic restricted the freedom of movement of Boston residents.  (Courtesy Newmark)Various measures show how the pandemic restricted the freedom of movement of Boston residents. (Courtesy Newmark)

Have and have nothing

While the outlook for certain parts of the commercial real estate market may be uncertain, other types of commercial space have never been more in demand, “said Steve Purpura, who oversees the commercial real estate business at CBRE Boston Consulting.

The life science research lab, for example, has seen a “massive inflow of capital,” Purpura said, adding, “You can’t do life science research at home.”

As millions of people shop online more and more, the demand for distribution warehouse space has grown dramatically.

“There are negative job offers [rates]”said Purpura.” If there was room, three people would want him for a seat.

At some point, urban retail, restaurant and office space will come back, Purpura said. And while hopes for a vaccine crystallize, well-funded investors could try buying real estate at a pandemic discount.

“In my world … just when you think it can never come [any] it’s better if you strike and get involved because it gets better, “said Purpura.

Berthelette from Newmark sounded similarly hopeful.

“Ultimately, the demand for commercial property, or real estate in general, is really all about the people – where they live, where they want to work,” said Berthelette. “Boston is a resilient city.”