SPOTLIGHT, TOP TREND 2023: OFFICE BUILDING BUST

DISTRESSED COMMERCIAL REAL ESTATE LOANS MOST IN 10 YEARS

The value of commercial loans officially considered “in distress,” meaning they are approaching default, reached $79.7 billion in this year’s third quarter, the highest since 2013, MSCI Real Assets reported.

Loans in the sector are burdened by high interest rates and falling demand among storefront properties and especially in office blocks where the shift to remote work has cut attendance by a national average of about 50 percent, according to security firm Kastle Systems, which monitors swipe card use.

Loans against office properties made up 41 percent of loans in distress and 93 percent of the third quarter’s increase in that category, MSCI said.

Another $215.7 billion worth of properties are nearing distress, with late payments or unleased square footage, the report noted.

Apartment buildings made up a third of distressed loans, not because the sector has weakened but because of an increase in the number of multifamily blocks in recent years, MSCI said.

Commercial property values sank 9 percent during the first nine months of this year, MSCI said in a separate report, and the number of sales in the sector plunged 53 percent compared to 2022.

TRENDPOST: As we have said since the beginning of the COVID War, the office real estate sector has been permanently diminished.

Trends now show the sector splitting in two.

Newer buildings with popular amenities—on-site gyms and coffee bars, green energy systems—are drawing tenants willing to pay premium rents. Older buildings unable to justify investment in amenities or infrastructure upgrades are seeing tenants leave and few new ones arriving.

As much as 25 percent of current office space in Western economies will become redundant over the next 10 years.

Many of those buildings will be taken by lenders and many will be seized by municipalities for back taxes.

However, banks and towns will be reluctant to own properties that are liabilities instead of assets.

Lenders and cities will work with office building owners, adjusting loan terms and rates and varying zoning and occupancy requirements to keep as many of the buildings in productive use as possible.

Still, a number of buildings will become worthless. Those will be sold for the value of the building lots they occupy or be taken by local governments for use as schools, storage space, or refurbished for office use.

We were the first to call the Office Building Bust and have greatly detailed its implications in articles including:

● “THE NEW LIFE OF LOCKDOWN” (19 May 2020)

● “REMOTE WORK = COMMERCIAL BUST” (2 June 2020)

● “SLIDING VALUE OF OFFICE SPACE HITS URBAN CENTERS” (11 Aug 2020)

● “WORK FROM HOME, CITY REAL ESTATE DOWN” (20 Oct 2020)

● “COMMERCIAL REAL ESTATE IN A TAILSPIN” (20 Oct 2020)

● “OFFICE WORKERS STAY HOME” (8 Dec 2020)

● “RETURN TO OFFICES POSTPONED: COMMERCIAL REAL ESTATE BUST?” (14 Sep 2021)

● “WORKERS STAYING HOME, COMMERCIAL REAL ESTATE DISASTER LOOMING” (19 Oct 2021)

● “COVID WAR KEEPING WORKERS OUT OF THE OFFICE” (16 Nov 2021)

● “NYC BUSINESSES: BYE, BYE NYC” (16 Nov 2021)

● “DELOITTE ABANDONS MORE LONDON OFFICE SPACE” (26 Apr 2022)