CloseUp View Of Businesswoman Holding Financial Stats


The number of office buildings burdened with troubled loans, or already repossessed by lenders, jumped 36 percent in this year’s second quarter from the first, MSCI Real Assets reported.

The value of the distressed loans rose to $24.8 billion, Bloomberg said, making it the most stressed category of commercial property debt.

That figure compares with $22.7 billion worth of retail sites, including malls, in financial trouble at the end of June and $13.5 billion in hotels. 

“The office sector was responsible for the largest share of marketwide distress,” MSCI’s report said. “It’s the first time since 2018 that neither the retail nor hotel sector was the biggest contributor.”

Even worse, MSCI found another $162 billion worth of properties headed for trouble, such as rising vacancy rates, late loan payments, or loans coming due.

Office buildings have been hit by higher interest rates and operating costs at a time when remote work has slashed the amount of office space that companies need or are willing to pay for. Nationally, office vacancy rates have set a record. (See “National Office Vacancy Rate Reaches Record, NAR Says” in this issue.)

A total of about $72 billion in commercial real estate loans are teetering, 13 percent more than in this year’s first quarter, Bloomberg noted.

Offices lead that category as well.

Nationally, as much as 20 percent of office space sits unused, according to brokerage Jones Lang Lasalle. On a typical weekday, only about half of office workers are at a company location, Kastle Systems said. The company measures swipe card use in 10 key cities and has reported an average daily attendance rate of around 50 percent for months.

The market price of office buildings has crashed by 27 percent this year as of 1 July, more than double the 12-percent loss in value of commercial properties in general, data service Green Street said.

Major property owners and private equity firms including Blackstone and Brookfield Asset Management have stopped making loan payments on office buildings they have judged to be not worth keeping.

Starwood Capital Group has defaulted on a $212.5-million loan on an Atlanta office tower, Bloomberg reported. Starwood and the lender are said to be negotiating.

About $189 billion in office-related debt will mature this year and $117 billion in 2024, the Mortgage Bankers Association said.

Commercial real estate is “in a Category 5 hurricane,” thanks to the U.S. Federal Reserve’s relentless campaign of interest rate increases, Starwood CEO Barry Sternlicht said in an episode of “Bloomberg Wealth with David Bernstein”. 

“It’s a blackout hovering over the entire industry until we get some relief or some understanding of what the Fed is going to do over the longer term,” Sternlicht added.

TRENDPOST: The Fed eventually will lower its interest rate, but that will not bring remote workers back to central offices. Remote work is now the norm. There will not be the same level of demand for office space that there was pre-COVID.

The number of office building loans in trouble will continue to rise, leading to a wave of defaults and bankruptcies that will leave banks throwing cash into reserves to cover the losses.

That will pull capital out of the economy, hampering business activity and economic growth. Depending on how quickly the new wave of failures arrives, it could be a key factor that tips the U.S. into recession.

For more details on the Office Building Bust and its fallout, see our past articles, including:

● “Commercial Real Estate in a Tailspin” (20 Oct 2020)

● “Deloitte Abandons More London Office Space” (26 Apr 2022)

● “GM Softens Back-to-the-Office Requirement After Worker Backlash” (4 Oct 2022)

● “New York City’s Workforce Sharply Shrinking” (24 Jan 2023)

● “Office Occupancy Half of What It Used to Be” (7 Feb 2023)

● “Study: One Billion Square Feet of U.S. Office Space Will Be Empty by 2030” (28 Feb 2023)

● “Remote Work Could Slash Global Value of Office Buildings by $800 Billion” (18 Jul 2023)


Across the U.S., the proportion of vacant office space has reached a record 13.1 percent, the National Association of Realtors (NAR) reported.

Although more people are spending more time in central offices, remote work has taken hold and companies are continuing to shrink their office footprints, the NAR said.

In 2018 and 2019, the average vacancy rate was about 9.5 percent. Since the beginning of 2022, the rate has hovered between 12 and 13 percent.

Another 102 million square feet of office space opened up during this year’s second quarter, compared to the same three-month stretch in 2022, according to the NAR.

Manhattan’s vacancy rate is about 22 percent, according to real estate service firm Cushman & Wakefield, the highest since records began being kept in 1984. 

More than 128 buildings on the island each list at least 200,000 square feet available for lease, data service CoStar reported. The total is more than 52 million square feet, the area of at least 40 Chrysler Buildings.

In a 2022 analysis titled “Work From Home and the Office Real Estate Apocalypse,” economists at New York and Columbia Universities calculated that New York City’s office buildings had collectively lost 39 percent of their value.

Earlier this year, they crunched the latest numbers and revised their estimate to an even more dire 44 percent.

Tech-centric urban areas fared better than Manhattan but not well. 

San Francisco’s offices are 18.85-percent empty. Houston and Dallas-Ft. Worth came second and third, with vacancy rates of 18.64 percent and 17.93 percent, respectively.

The office building bust, which we predicted three years ago and have been documenting since, has not yet slowed commercial real estate lending, which is done mostly by small and regional banks. Borrowing is growing by the week and delinquency rates remain under 1 percent, NAR noted.

TREND FORECAST: Office vacancy rates are rising, $200 billion or more in commercial real estate loans are needing to be paid off or refinanced before 2025, and office landlords are scrapping with cities to lower the appraised value of their properties.

These factors point to a wave of defaults washing toward the shores of U.S. banks. As we have predicted (and Janet Yellen has agreed), more banks will see themselves in danger of failing. Some will collapse, the number of bank mergers will increase, and the sector as a whole will tighten financing requirements on office properties, leaving many owners no choice but to default or walk away.

The economic dangers ahead for the banking system, cities that are losing needed tax revenue, and the numerous businesses going out of business as fewer people commute is barely reported in the mainstream media. We forecast that as interest rates rise so will defaults, especially on floating loans which will in turn take down many small and medium size banks. And as they go out of business the big banks will get bigger.


Goldman Sachs, with a $27-billion portfolio of commercial real estate loans, erased $1.15 billion from its loan holdings’ value in the second quarter, mirroring the sinking value of a large portion of U.S. office buildings.

The megabank refused to disclose which commercial real estate loans were wobbling and said that office properties account for only a small percentage of its commercial loans.

Office landlords have seen tenants shrink their office space as employees work from home. (See “National Office Vacancy Rate Reaches Record, NAR Says” in this issue.) 

At the same time, maintenance and other costs are up along with interest rates. Many building owners find they have to offer rent-free months, redecorating allowances, and other perks to get and keep tenants, which cuts their margins even more.

The same catalog of office-related issues led JPMorgan Chase to charge off $100 million in loans in the last quarter. It also increased its cash reserves against loan losses by $389 million due to “updates related to certain assumptions related to office real estate.”

Morgan Stanley also set aside more cash to cover loans that go bad. The decision was “primarily driven by credit deteriorations in the commercial real estate sector,” the bank said.

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