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Office Real Estate ‘the Next Big Shoe To Drop’

230526 Office Real Estate Blog

Regional banks could be next to feel the hit—much of the estimated $1.2 trillion in office space debt is owed to them.

As the Wall Street Journal reported last week, the return to the office has stalled. But, if you have ventured into the office recently, you probably didn’t need a newspaper to tell you that. All you had to do was look around.

Hybrid here to stay? Office occupancy, which hit the 50% mark for the first time since the pandemic earlier this year, has now stalled. And, according to Scoop Technologies, which tracks workplace strategies, the number of companies requiring employees to work from the office full-time actually decreased over the past three months, from 49% to 42%. Hybrid employees typically spend around 2.5 days in the office each week.

NPR’s Planet Money newsletter notes that around 20% of U.S. office space sits empty, a number that “exceeds the vacancy rate following the 2008 financial crisis.” In some cities, like Los Angeles and San Francisco, the percentage is creeping closer to 30%.

Perhaps unsurprisingly, share prices for some of the largest commercial landlords have plummeted recently, nearing historic lows. And many short-sellers are now targeting office stocks, betting the prices will drop further.

Banks in the crosshairs. Businesses that rely on foot traffic from office workers continue to struggle, but regional banks could be next to feel the hit—much of the estimated $1.2 trillion in office space debt is owed to them. In its Financial Stability Report this month, the Federal Reserve warned that the decreased demand in office space could lead to a correction in the values of office buildings and higher interest rates will make many borrowers unable to refinance their loans.

“It’s the next big shoe to drop,” Kenneth Rosen, of the real estate research firm Rosen Consulting Group, told NPR.

Adding to the concern, the Wall Street Journal reports that some heavy hitters in office real estate are choosing to cut their losses and default on some loans. These big landlords with deep pockets fear foreclosure less than smaller borrowers, because they know their creditworthiness won’t take too much of a hit.

“The thinking was that the institutions would be the last to give the keys back, but it may be the other way around in some cases,” says Rachel Vinson, president of U.S. debt and structured finance at CBRE.

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