Empty offices turned into time bombs

Landlords and banks are grappling with changes to how and where people work, shop and live in the wake of the pandemic. On the other hand, higher interest rates make it more expensive to buy and refinance buildings.

According to the Mortgage Bankers Association, approximately $1.4 trillion in commercial real estate loans are due this year and next in the United States alone. But when the due date arrives, homeowners facing large principal payments can choose not to pay rather than borrow again to make the payment.

In the US, where return-to-office rates are lower than in Asia and Europe, corporate-grade office values ​​have fallen 27 percent since March 2022, when interest rates began to rise. rise, while the prices of apartments and shopping centers have fallen. 21 percent, according to data analysis firm Green Street, fell 18 percent.

Office prices are expected to fall more than 25 percent in Europe and around 13 percent in the Asia-Pacific region, according to PGIM Real Estate forecasts.

Prices are falling sharply as the number of office offers falls. While it took six years for US office prices to recover after the 2008 crash, CBRE Group chief economist Richard Barkham said they expect the recovery to take 10 years this time.

Commercial real estate woes are expected to deepen the crisis by increasing stress on the financial system and have a transformative effect on some cities struggling with low property tax revenues.

As the debt problem created by empty office buildings spread from Los Angeles to Sweden to South Korea, problems began to mount in major financial and business centers around the world.

REMOTE WORK REDUCES THE NUMBER OF OFFICES

The place with the highest number of buildings in default in the US was San Francisco, where real estate prices reached record levels in the last 10 years. Office vacancy and availability has tripled compared to pre-pandemic days, and San Francisco is struggling to attract employers who choose to work remotely.

On the other hand, according to the building security company Kastle Systems, only half of the employees in New York are in the office. For this reason, many buildings are struggling with the loss of tenants. For up-to-date office needs, employers prefer newly constructed buildings near Hudson Yards or Grand Central Terminal over older properties.

Ruth Colp Haber, CEO of brokerage firm Wharton Property Advisors, said: “The best buildings will survive and survive this crisis. But for buildings that have a large unevenness and also require a lot of work, the situation is not going to improve ”, she explains.

THE CHANCE OF OLD BUILDINGS IS EXTREMELY LOW

Aside from the US financial centers, other developing cities are also struggling with office vacancies. The vacancy rate for rental offices in Atlanta hit 31 percent in the first quarter, nearly double the pre-pandemic level, according to British property services firm Savills Plc. In Texas, too, the areas available for rent have more than doubled since 2022.

In some places, new supplies cannot be found for every old building, while new supplies meet the drop in demand. “It’s really hard to turn a 1990s office into something other than a 1990s office tower,” explains Lea Overby, commercial real estate analyst at Barclays Capital.

CHOICE OF COMPANIES INCREASING RENTS IN LONDON

The widespread adoption of hybrid work is affecting London unevenly. Companies search for locations in the best buildings and locations to attract workers. Rents are also rising as businesses are willing to pay more per square foot while taking up less space overall. That’s why there’s a widening gap between winners and losers, says Doug Ressler, Yardi’s principal investigator.

Another problem emerging in the London property market is the possibility of hundreds of buildings becoming obsolete for not complying with environmental regulations. Because in the UK buildings have an energy performance rating from A to G and by 2030 it will be illegal to rent commercial buildings below B.

THE SITUATION IS DIFFERENT IN STOCKHOLM AND HONG KONG

The main problem in the Swedish real estate market is the accumulated amounts of debt. Homeowners in the largest Scandinavian country will have to renew or refinance $42 billion in bonds over the next five years, about a third of which matures next year.

Unlike New York and London, Hong Kongers can’t blame remote work for the recession. Employees have already returned to the office, as the city’s highly efficient public transportation system and small apartments reduce willingness to work from home. In March, the number of subway passengers surpassed 2019 levels.

But the collapse of the commercial market in an environment of rising interest rates makes it difficult to refinance buildings and find buyers easily. Therefore, homeowners are forced to choose between selling cheap or reducing their interest payments.