Offices Vacancies & Hybrid Work Growth Present Big Problems for Landlords and Lenders

After more than 3 years of WFH, companies are struggling to lure (or compel) employees to return to the office (RTO). This push by employers continues to generate pushback from employees across the country and is creating new tensions between employers and the people who work for them. The situation also is having a devastating affect on commercial real estate owners nationwide, and is affecting urban life in major U.S. cities.

Fortune’s CEO Daily newsletter noted on July 18 that CEOs’ outlook on the economy is showing “declining pessimism (or growing optimism)” about the country’s economic future. However, that positive (or non-negative) news was immediately followed by this: “But it’s worth noting one large dark cloud hanging over that outlook: commercial real estate.”

Here's how the author summed up the problem: “Office occupancy rates today in many cities are at about 50% of their pre-pandemic levels. And interest rates are up substantially—the yield on the 10-year Treasury, as a benchmark, has jumped from around 1% to 4%. That means the capital cost of acquiring real estate has gone up sharply, while demand has gone down.”

The newsletter continued with a less-than-rosy forecast from Kiran Raichura, Deputy Chief Property Economist at Capital Economics. “His organization is predicting a 35% decline in office values by 2025. And because the causes are structural rather than cyclical, the market could take a long time to recover. How long? Perhaps not until 2040, he says.”

And with banks on the hook for CRE loans, this could lead to big troubles for the banking sector, affecting lending of all types if banks have to tighten their belts to survive—unless occupancy rates pick up and interest rates come down, which few currently are predicting.

Of course the problem varies by region, with better prospects for Sunbelt states than for large northern and coastal cities. Here are a few recent examples:

• CRE loan distress up in 70% of largest metro areas in June
• JPMorgan, Wells Fargo prepare for losses on office loans
• Banks step up U.S property loan tweaks to limit defaults
• The commercial real-estate market’s impending crash
• Office vacancies hit new high as U.S. cities struggle to recover from pandemic

It’s wordwide

And just as Covid wreaked havoc across the globe, the problems with empty office buildings and CRE loans coming due in a higher-interest market are not confined to the United States:

• Chinese property developer Evergrande posts $81 billion loss over the past 2 years
• Remote work could wipe out $800B from office building value in major global cities by 2030
• Why a crisis is looming in commercial real estate

Caveat lector: Of course, predictions and forecasts are just that. The “imminent recession,” which has been “just around the corner” for a while now, still hasn’t shown its face… and is even showing signs of not showing at all. (Thank you, the Fed?)