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Signs Of A Slow Motion Crackup In Office Real Estate Is Emerging

Daniel Plainview

Updated: March 30, 2022

office real estate
Editor’s Note:

EDITOR'S NOTE: It appears that the work-from-home (WFH) trend may become a permanent fixture in the American labor landscape. While people are getting back to work, shifting the labor market into a slow and steady recovery, fewer workers are willing to re-enter the physical workspace. The issue with WFH is that it may begin causing serious problems in the commercial real estate sector. What of the mortgages for offices that remain only partially occupied? Missed mortgage payments are reaching a point last seen during the 2008 financial crisis. And in a recent study cited below, office vacancy rates are rising nationwide, not falling. So, might this signal a looming collapse in the office real estate market? Not quite yet. Read on for more details.

Data: CoStar, Trepp, Barclays Research; Chart: Kavya Beheraj/Axios

More than two years after COVID-19 upended the world of work, signs of a slow-motion crackup in office real estate are emerging, Matt writes.

Why it matters: Fresh commercial real estate data suggest that working from home (WFH) is becoming a permanent feature of the American economy, a development that has major implications for everything from housing prices to transportation policy to municipal finance.

State of play: Vacancy rates continue to climb in major markets across the country, and signs of distress in loans backed by office buildings appear to be growing.

  • Barclays analysts noted last week that the share of office mortgages that have been assigned to either "watchlists" of loans showing signs of being in trouble or "special servicing," where loans with missed payments are sent, has hit more than 21%. That's the highest since the financial crisis.
  • "That's an indication that something not great might be starting to bubble up within the office sector," Lea Overby, a Barclays analyst covering the commercial mortgage market, tells Axios.

Meanwhile, troubling anecdotes are also starting to surface.

  • Most recently, private equity giant Blackstone stopped making payments on a loan backing a 600,000-square-foot art deco office tower in midtown Manhattan. The building, 1740 Broadway, is expected to be nearly empty next year after the main tenant, troubled retailer L Brands, decided not to renew its lease.
  • Blackstone told Axios in an emailed statement that the building "faces a unique set of challenges," adding that "we continue to be big believers in New York and cities like it that are hubs for innovation and talent.”

The big picture: Loads of people who started WFH during the pandemic aren't going back.

  • Nationwide, office vacancy rates rates have risen to 12.2% from 9.7% over the past two years, according to Barclays, which cited data from Costar, a commercial real estate database.
  • Those numbers likely overstate how much of that office space is actually being used. Recent data from Kastle Systems, which measure occupancy by looking at foot traffic into offices, showed vacancies of about 60% in major markets.

The bottom line: The office real estate market isn't going to collapse overnight, as leases on commercial office space often lock tenants in for as long as 10 years.

  • But trends suggest that American office space — along with the economy as a whole — is going to see significant change for years to come.

Originally published on Axios.

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