Beset by high interest rates, rising operating costs, and falling demand, office buildings are plunging in value, as we have reported in 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)

● “Business Office Bust Begins to Bite” (20 Dec 2022)

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

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

However, “the private market hasn’t started to heavily mark down” office towers, Scott Kleinman, co-president of private equity giant Apollo Global Management, said in a Financial Times interview last week.

“The equity will be the next shoe to drop in the U.S.,” he said. “Like everything else, it has been priced so tightly and there hasn’t been a commercial real estate crisis in the U.S. since the ‘90s.”

Office towers’ values are falling fastest in large, old-order urban centers such as New York City and San Francisco, Ann Walsh, Guggenheim Partners’ chief investment officer, told the FT.

Values also are sliding for older buildings needing to be refurbished or upgraded, as well as buildings lacking amenities such as workout rooms that now lure tenants.

“We’re likely going into a [commercial] real estate recession,” she added, “but not across the entire market. Lenders will be very choosy about what loans they make.”

Some lenders now demand that property owners pledge their personal assets as a guarantee of repayment of office building loans, Walsh noted.

Securing loans to buy or rehab office buildings was difficult but became even harder after the mid-March implosion of Signature and Silicon Valley banks. 

Lenders then were spooked and tightened their lending criteria even more, especially among the small and mid-size banks that hold a majority of U.S. commercial real estate loans.

In addition, more than $160 billion in outstanding real estate loans will come due from now through 2024. Many will need to be refinanced, but market conditions will make that financially impractical for a growing number of owners, leading them to sell at rock-bottom prices, hand their buildings back to their lenders, or default.

“There’s a [debt] maturity cliff for a lot of this real estate in the next few years, a significant portion of which is funded by regional banks,” an unnamed CEO of a large American bank (also unnamed) told the FT.

“Commercial real estate is leverage on leverage on leverage,” the CEO said. “If people are forced to quickly unwind that leverage, [difficulties] can pop up in other places.”

“We see a perfect storm of rising interest rates forcing assets to reprice down, combined with a structural decline in [occupancy] rates and aging assets,” Mathieu Chabran, cofounder of asset manager Tikehau Capital, warned in a comment to the FT.

PUBLISHER’S NOTE: Early in the COVID War, in articles such as “Real Estate’s Reality” (7 Jul 2020), we warned that demand for office space would crash and never fully return. Events have long since proven our prediction correct. 

We also have accurately predicted the resulting financial damage to cities, warning of it in articles including “New York Office Vacancies Set Record” (13 Jul 2021) “Mass Expiration of Office Leases Threatens Landlords” (26 Apr 2022), and “‘Dimming Hope’ That Pre-COVID Demand for Office Space Will Return” (22 Nov 2022).


New York City’s office workers have drawn the line and it seems to be somewhere around 60 percent.

The number of workers in the city’s office buildings on any given weekday is averaging 61 percent, according to the Real Estate Board of New York, having “essentially plateaued” since peaking at 65 percent in summer 2022.

However, Kastle Systems’ swipe card data from 10 major metro areas showed office occupancy at 49.9 percent last week. On Tuesday, offices averaged 58 percent full, plunging to 34 percent on Friday.

A report from the Boston Consulting Group leans toward the 60-percent figure but also warns that cities face a tide of “zombie” office buildings where half or less of the space is used each workday.

“Assuming these trends continue and organizations right-size to fit new levels of demand, utilization may tick up slightly from today’s depths, but still only 60 to 65 percent of today’s office space will be needed,” the report said.

The Boston report cites implications that The Trends Journal has noted before: a catastrophic loss of municipal property tax revenue and the devastation of downtown retail ecosystems.

It also warns employers that demands that everyone show up at the office every day will fail, drive away valuable workers already on the payroll, and thin the talent pool available as new hires.

However, companies are not yet willing to compromise: at the end of last year, 13 percent of jobs posted on LinkedIn offered remote work as an option, compared to 20 percent in March 2022.

TREND FORECAST: Although office attendance has been edging up, it never will return to pre-COVID levels.

That might disappoint employers but it will devastate the owners of office buildings, as we have been saying since mid-2020, beginning in “Real Estate’s Reality” (7 Jul 2020).

The future we had forecast in “Business Office Bust Begins to Bite” (20 Dec 2022) becomes more real every day: thousands of office buildings, especially older ones, across the U.S. are doomed. 

Some may be converted to apartments, but only those accidentally suited to financially feasible conversion. Most are not suited, for reasons we explained in “Plan to Turn New York’s Vacant Hotels To Housing Not Working” (5 Apr 2022) and “Wall Street, Dead Street. Office Buildings Going Condo” (28 Jun 2022).

As we have noted before, some creative landlords will meet city-dwellers’ need for experiences by opening their empty office space to yoga studios, music academies, coffee houses, adult education centers, and other service-oriented enterprises.

These landlords will find interested partners in city agencies that will need to provide waivers or changes to zoning ordinances, building codes, and other regulations to accommodate these new tenants.

However, landlords will be stuck holding many buildings, even newer ones, unable to pay their way. 

Eventually, the owners will default on their taxes or mortgages. Ultimately, cities will wind up owning portfolios of empty office buildings that no one can afford to keep up.

At that point, the real estate will be sold for cheap, relatively speaking, and buildings will be demolished to prepare the sites for new lives in a new economy.

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