Commercial Real Estate Office Sector Headed to a Severe Collapse??

The commercial real estate market is headed for a severe collapse due in large part to sky-high interest rates and declining property values, according to a survey of investors.

Around two-thirds of those who responded to a Bloomberg News survey said they believe that the commercial real estate market will recover only after a crash.

When asked when they believe the price of office properties will hit bottom, 44% said they expect that to happen in the second half of next year while 22% said it will be in the first six months of 2024, according to Bloomberg News.

Just 6% of the 919 respondents said that prices would bottom out this year while 29% predicted that it would happen in 2025 or beyond.

The Fed has raised interest rates aggressively, which is increasing the cost of financing commercial properties at a time when there is also reduced need for them, which has hit rent levels.

Investors are bracing for a possible crisis triggered by default on $1.5 trillion in debt that is coming due by the end of 2025,.

Some $270 billion in commercial real estate loans held by banks are set to mature in 2023, according to Trepp.

Over the next four years, commercial real estate properties must pay off debt maturities that will peak at $550 billion in 2027, according to analysts at Morgan Stanley.

Earlier this month, a study released by economists from NYU Stern Business School, Columbia Business School and the National Bureau of Economic Research showed that vacancy rates are at 30-year highs in many American cities.

In New York City, the vacancy rate was 22.2% in Q1 of 2023.

Office buildings in New York City — the world’s largest commercial real estate market — have lost $76 billion in value from their most recent sales prices, according to broker JLL.

Blackstone and RXR sold the office building at 1330 Avenue of the Americas for $320 million — a third less than the listing price in 2006.

Real estate firm Cushman & Wakefield recently predicted that there could be 1 billion square feet of unused office space in the US by 2030.

The New York Fed said earlier this year that it was unclear when or if the commercial real estate sector would return to its prior strength.

Inflation in the new era of remote work is creating a global commercial real estate “apocalypse” where zombie properties sit vacant and owners with loans coming due hand their keys back to lenders, according to experts.

“The apocalypse that’s facing commercial real estate at this moment is all about interest rates and debt maturities,” Harold Bordwin, a managing director at Keen-Summit Capital Partners, a New York firm specializing in assisting distressed properties, told The Post.

“Even if you have a building that had all of the same tenants and all of the same income it had three years ago, if your debt is maturing today, you have a real problem,” Bordwin added.

While these spaces don’t skimp on the square footage, the the inflation wave that crested at a 40-year high last year and remains raised has owners scurrying.

In addition, the Federal Reserve’s continued tightening to reach its 2% inflation goal has increased the returns on risk-free government bonds, forcing commercial real estate investors to demand more yield to simply justify holding the physical asset, Bloomberg reported.

The proof is in the vacancy: Just last week, the owners of downtown San Francisco’s largest shopping centers abandoned the lot after 20 years.

Unibail-Rodamco-Westfield said late on Monday it will transfer its Westfield San Francisco shopping mall to lenders as the shopping center continues to face declining sales, occupancy and foot traffic.

US offices are also plagued by emptiness, prompting landlords to hand keys to their properties over to lenders that are worth less than the debt secured against them, according to Bloomberg.

Earlier this month, a study released by economists from NYU Stern Business School, Columbia Business School and the National Bureau of Economic Research showed that vacancy rates are at 30-year highs in many American cities.

In New York City, the vacancy rate was an eye-watering 22.2% in Q1 of 2023.

The study predicted that rates would plunge even further later this year as prices are certain to go down the drain.

Lower values means less tax revenue. In the case of the Big Apple, the paper predicted a 6.5% drop by 2029.

To plug the hole, cities will raise taxes and fees in other ways — making the city less attractive to live in, which means even less revenue.

San Francisco — a hub for Big Tech — meanwhile, has already seen companies like Salesforce, Tesla and Oracle, among others, taking their leasing dollars elsewhere.

When Salesforce — a software company that’s San Francisco’s largest private employer — has made three separate announcements since 2020 of plans to slash the office space it owns in the city.

The consequences have been devastating for the California city, where office workers accounted for 72% of the area’s GDP — $531.28 billion in 2019 — before the pandemic.

Bordwin said lenders are going to be faced with the choice of “pushing mark to market” or “extending and pretending.”

Mark to market was a tactic used in the savings and loan crisis of the ’80s and ’90s, Bordwin told The Post, where stress debt was cleared by asking, “Who will buy this at what price?”

Things were sold at pennies on the dollar, and regulators made their way through that inventory,” he said.

Another option would be the “extend and pretend” tactic that was used during the financial crisis of 2008, where borrowers “take loans, allowing banks not to think about what collateral is really worth,” Bordwin explained.

However, “there is just a massive amount of obsolete space,” the real estate expert said, noting how the pandemic shifted the way of the workforce to remote and hybrid models.

“Nobody has a great answer to how that could be dealt with,” he added, noting that “a portion of these buildings could end up getting knocked down eventually” if they’re deemed unable to be converted into residential or lab space.

The vacancy problem isn’t unique to the US.

In Hong Kong — where gleaming office towers are some of the most expensive commercial real estate in the world — a record 13 million square feet of office space sat empty in June and 15% of the most valuable space was vacant, Bloomberg reported.

Billionaire Li Ka-shing’s 63-story Cheung Kong Center sits about 25% vacant.

Meanwhile, two “trophy” office buildings in London are now in the hands of lenders, according to Bloomberg.

CLASS A Office

Avg Rent Vacancy Rate. Class A Office Spotlight Lease Rate

National $37.77 17.80%

Boston $45.61 10.30% Kendall Center $126.34

New Jersey $34.60 17.50% 10 Exchange Place . $55.30

Twin Cities $26.71 17.20% Tractor Works Building . $40.71

Atlanta $31.20 17.00% 300 Colony Square $52.00

Philly . $31.77 13.80% Two Liberty Place $53.50

Houston $30.69 25.00% Texas Tower $60.90

Denver $30.70 21.90% 144 Fifteenth Street $63.50

Chicago $27.84 . 17.20% CME Center $50.30

Seattle $37.55 21.80% 1208 Eastlake Avenue East $94.00

Phoenix $27.68 17.80% Camelback Collective $55.00

Detroit $21.50 27.80% One Campus Martius $39.13

Austin $41.88 20.50% Indeed Tower $83.77

Orlando $23.65 16.50% Heritage Park $42.00

Tampa $28.27 14.20% Water Street Tampa $61.50

DC $40.65 15.70% 455 Massachusetts Ave NW $76.00

Los Angeles $41.84 16.00% 2000 Avenue of the Stars $118.20

Nashville . $30.29 16.10% Three Thirty Three $44.38

Bay Area $54.01 18.90% 325 Lytton Avenue $159.00

San Diego $42.47 18.20% One La Jolla Center $70.20

Dallas $27.57 19.50% 17S eventeen McKinney $67.42

Manhattan $70.71 17.40% 550 Madison Avenue $210.00

San Francisco $63.08 22.60% Sand Hill Collection $195.60

Charlotte $31.80 15.70% Rotunda Building $46.42

Portland $27.62 16.40% 12th & Morrison $47.01

Miami $44.83 14.50% 830 Brickell $180.00