Elderly Upset Man Holding Piggy Bank as Businessman Tries to Take it Away

In this section:

● Pension Funds Lose Billions in Commercial Real Estate Bust

● Insurance Firms to Office Building Owners: You’re on Your Own

● Manhattan’s Largest Office Landlord Disappoints Analysts


U.S. pension funds are preparing to subtract billions of dollars from their assets as commercial property in general, and office buildings in particular, lose market value.

The California State Teachers Retirement System (Calstrs) holds $52 billion in real estate, having moved a large share of its funds out of stocks and bonds and into property in recent years in search of greater rewards than those markets were delivering. 

Its holdings include a $240-million share of a 23-story office tower in Austin and $1 billion in a European property fund run by Blackstone.

Over the past decade, commercial real estate rewarded Calstrs with double-digit returns. Last year, the million-member pension plan took a 6.7-percent loss overall as stock and bond markets fell.

“Office real estate is probably down about 20 percent in value,” Calstrs CFO Christopher Ailman told the Financial Times. “Our real estate consultants said real estate is going to have a negative year or two.”

The chief worry at State Street Bank, which manages pension funds for several major corporations including Boeing and American Airlines, is “what happens with commercial real estate, particularly offices,” CEO Ron O’Hanley said to the FT.

The office bust will add to what he called a “gentle slowdown” in the U.S. economy, he predicted.

U.S. office real estate could fall 30 percent from its peak values, according to Capital Economics, while buildings in San Francisco and other cities hit hardest by the tech slump and the shift to remote work could lose half their value.

Small and regional banks also are bracing for damage from the office building bust. They are estimated to be involved in 40 percent or more of commercial property loans, analysts calculate. 

TRENDPOST: Like many investors, pension funds were victims of inertia.

They were reluctant to see the warning signs that office real estate’s value was sliding so, instead of being cautious and selling at a loss, they stood pat and hoped that “things will get better,” as many executives made pronouncements about employees returning to the office.

Workers would return early in 2021, bosses said.  Oops, we meant spring, they said when employees failed to flock back. They definitely will return in fall 2021 or else, employers declared.

It has taken two years’ worth of evidence to remind pension funds that their primary responsibility, alongside maximizing returns, is to not lose money by hoping a sinking ship will begin to float again.


For decades, life insurance companies have been a reliable source of capital for office building owners and investors. 

No longer.

Life insurance firms are shutting off funds to the sector at a time when office property owners face an estimated $80 billion in loans needing to be refinanced or paid off this year, The Wall Street Journal said.

Insurance firms began putting money into commercial real estate, including office buildings, during the Great Recession when stocks and bonds offered poor returns.

The sector was a reliable performer while interest rates remained low and large-scale remote work was a notion instead of a reality.

Now office property values are sliding as occupancy rates sit at half of pre-COVID levels. Remote work is the new reality. Interest rates are rising along with maintenance and repair costs. 

Recently, even reliable property giants such as Columbia Property Trust have defaulted on loans tied to office buildings. (See “Office Tower Owner Defaults on $1.7 Billion in Mortgages,” 28 Feb 2023 ).

Life insurance companies hold about 15 percent of the $4.5 trillion in loans against commercial real estate, Moody’s Analytics reported.

About 15 percent of life insurance firms are cutting back their investments in office real estate, three times more than a year ago, according to a new survey by Goldman Sachs Asset Management.

“We don’t want to invest that capital until” property valuations stabilize, officials at Principal Financial Group, an Iowa insurance company, said in a March call with investors.

Insurance firms are shutting their wallets at the same time that banks are tightening their lending in the wake of the collapse of Signature and Silicon Valley banks.

Banks are building their cash reserves against increases in customer withdrawals and in expectation of tighter regulations around cash cushions. 

U.S. banks also are holding more than $600 million in unrealized losses in low-yield bonds they bought during the COVID War when interest rates were close to zero. When those bonds mature, banks will need bags of cash to cover their losses.

“The trillion-dollar question is ‘what is the value of an office building?’,” Anant Bhalla, CEO of American Equity Investment Life Holding Co. said to the WSJ. “It is very hard to know what ‘normal’ is in the office market post-COVID.”


SL Green Realty, Manhattan’s largest owner of office buildings, reported first-quarter cash flow from operations was 10 percent below analysts’ expectations.

The company reported giving an average of 4.8 months of free rent—about 6 percent of a lease’s value—to lure and keep tenants, double the Pre-COVID average of 3 percent, The Wall Street Journal noted.

The number of office jobs is 15 percent greater than in 2019, Green said in a statement, but 17.1 percent of Manhattan’s office space is idle, thanks to employers acceding to remote work as the new normal.

There is about twice as much empty office space on the island as there was at the beginning of the COVID War, according to real estate service firm Colliers International.

Office occupancy—the rate at which people actually visit central offices—is about 46 percent in Manhattan, Kastle Systems reported. The company monitors swipe card usage in more than 2,000 office buildings in 47 states.

The occupancy rate has remained constant in the high 40 percent range for more than a year, despite some employers such as JPMorgan Chase demanding all employees spend five days a week on site.

While there has been a movement to convert redundant office buildings to apartments, the notion has confronted several difficulties, as we noted in “Midtown Manhattan Still Has the COVID Blues” (29 Mar 2022).

Because of air conditioning, office buildings have sealed windows, which are expensive to replace. Office towers also are designed with large interior spaces that have no direct natural light. 

The value of a building for residential use “probably needs to be 50 percent above that of offices for a conversion to be worthwhile,” according to the WSJ.

However, Manhattan’s office space was priced at 87 percent more per square foot than apartments at the end of March, Colliers data showed.

Although the value of office buildings is declining steadily, as we note in “Pension Funds Lose Billions in Commercial Real Estate Bust” in this issue and in several previous articles, the spread remains too large to make conversions financially feasible without a much deeper crash in office buildings’ market value.

TREND FORECAST: As the office building market continues to slide over the next few years, a significant number of office towers will be foreclosed; some owners will hand the keys to their lenders and walk away.

Some of the vacant buildings will be razed and the lots sold for new development. Others will be taken by cities for back taxes. Some of those will be renovated at public expense as low-income apartments or shelters for homeless people.

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