Bloomberg article written by Noah Buhayar, John Gittelsohn and Jackie Gu. Published December 22, 2020.

The coronavirus pandemic shuttered thousands of U.S. restaurants, gyms and stores, kept office workers at home and left hotel rooms sitting empty. Yet, so far, the commercial real estate market hasn’t really had a reckoning.

That’s set to change.

Lenders have granted struggling building owners months of forbearance, avoiding fire sales. But even as vaccines herald the slow return to normal life, it’s increasingly clear the fundamentals of real estate have been altered.

Next year, many property owners who’ve fallen behind on debt are going to have to put more money into their buildings, sell at distressed prices or hand the keys back to the bank. Roughly $430 billion in commercial and multifamily real estate debt matures in 2021, forcing lenders and borrowers to come to terms about what buildings are worth in a world the pandemic reshaped.

“That period of ‘let’s just put a Band-Aid on it’ is more or less coming to a conclusion,” says Wendy Silverstein, a former executive with Vornado Realty Trust and WeWork who recently started a restructuring and advisory firm. “There’s a lot of collateral damage that’s going to be hanging around for a while.”

That damage has the potential to ripple far beyond building owners and their tenants. Commercial property underpins the tax base in many cities across the U.S., and a downturn could pummel local budgets. As loan losses mount, the slump could also put stress on the banking system. The Federal Reserve singled out commercial real estate in its most recent Financial Stability Report as showing particular signs of weakness.

Projections from real estate services firm CBRE Group Inc. suggest that property values for apartments, offices and retail real estate won’t find their bottom until the middle of next year. Worse, the rebound to pre-Covid levels could take until 2022 or beyond. One exception to the trend: industrial real estate, the warehouses and logistics centers that have gained value as investors snapped up buildings essential to the delivery economy.

Unlike the last property market downturn, which was caused by excesses and exuberance in the financial markets, Covid-19 has upset real estate fundamentals by changing how we lead our lives.

Travel will be slow to come back, leaving millions of hotel rooms empty. Companies are already deciding they’ll need less office space than before, either because of staff cutbacks or because more of their employees will permanently work from home. And the rise of e-commerce—along with small business closures—will create a glut of retail space in a country that already had too much of it.

By one measure, about a billion hotel room nights will go unsold this year. Foot traffic on Black Friday, the traditional start of the holiday shopping season, plunged more than 70% at shopping malls as consumers bought Christmas gifts online, according to S&P Global. More than 100,000 restaurants are closed permanently or long-term.

“Retail will remain just a mess, hospitality will have a very challenging year, and, in more isolated instances, office will be problematic,” says Dave Bragg, a managing director at real estate research firm Green Street.

The most glaring distress is in the $529 billion market for bonds backed by commercial real estate loans. The delinquency rate last month for commercial mortgage-backed securities (CMBS) was 20% for hotels and 14% for retail, according to Trepp. Those obligations that will become more difficult to repay as they fall further behind.

To a large extent, real estate has always been about location. And, if nothing else, the pandemic has reshaped where people want to live, work and shop. The Atlanta Fed recently began tracking fundamentals for apartments, offices, retail and industrial real estate in metro areas across the U.S., creating an index of whether they’re trending in a positive or negative direction.

As remote work has enabled people to leave high-cost areas like New York and San Francisco, for instance, their apartment markets have started to show the telltale signs of stress: rising vacancies and falling rents. More affordable places like Dallas and Indianapolis are holding up better.

Office owners in many high-cost areas are going to have to contend with higher vacancies as companies plan for a future where remote work is far more common. Deutsche Bank AG is weighing a plan where employees would spend two days a week at home, while Facebook Inc. has said that half of its workforce could be remote in the next decade.

Others are considering shifting where their workforces will be. Goldman Sachs Group Inc., for instance, has scouted for offices in South Florida in a potential relocation of part of its asset-management business from Wall Street. Silicon Valley stalwarts Oracle Corp. and Hewlett Packard Enterprise Co. are moving their headquarters to Texas.

For now, office use is still just a fraction of what it once was. But it’s faring better in car-dependent cities like Los Angeles and Dallas than in places where people are more likely to ride public transportation, such as San Francisco and New York.

Even borrowers who are current on their payments may face challenges when their debt matures and they need to refinance or pay off their principal. Financial restructuring has already begun, mostly behind the scenes.

“Now what you’re seeing is somebody has to write a check,” says John Murray, head of commercial real estate at Pacific Investment Management Co. “The timeout is over.”

The new lifelines come with stricter terms, often in the form of preferred equity or principal payments to reduce the loan-to-value ratio, he says.

Even as an onslaught of distressed debt looms, there’s plenty of capital to chase deals. Private real estate debt funds raised $10.7 billion in the third quarter, the most of any strategy, according to Preqin, while North American real estate funds for all types of investment were sitting on almost $200 billion in dry powder in December.

All that money may limit how far commercial real estate prices fall. Congress’s new Covid relief agreement, which allows banks and other lenders until the end of next year to work with delinquent borrowers, also could give businesses more time to stay afloat. And by mid-2021, widespread vaccinations may allow consumers to finally escape from home and return with open wallets to hotels and malls. As Richard Barkham, chief economist for CBRE, put it: “We’re entering the dark before the dawn.”