The Implosion of Commercial Office Space Has Begun – Part 3

The implosion of commercial real estate (CRE) sparked by office space vacancy rates during the pandemic and a remote work from home (WFH) culture has accelerated in several major metropolitan areas this summer. A study from researchers at New York University and Columbia University found that offices in the city will lose at least 44% of their pre-pandemic value by 2029 primarily due to the impact of WFH. Across the country, values for offices have decreased by 27% since March 2022 according to data analytics company Green Street. Despite what the disastrous “Bidenomics” hopium narrative is selling, the U.S. economy is tumbling toward another great recession scenario. Numerous sources have cited since 2022 that the CRE market was the next shoe to drop.” Here’s two excerpts from Part 2 (Twitter thread) published in May:

“A negative outlook in the commercial real estate (CRE) market emerged from a combination of trends that include secular and cyclical ones, a liquidity crisis in the banking sector, and the wicked crime wave in certain major metropolitan areas. The secular trend is comprised of a steady increase in e-commerce sales that put pressure on brick-and-mortar retail and anchor department stores that are disappearing from shopping malls after having faced numerous challenges over the last decade or so. More recently, a post-COVID ‘work from home’ (WFH) movement that is permanent for a large percentage of the workforce is coming home to roost with enormous vacancy rates in commercial buildings and office space.” – TraderStef


Executives and investors fret about impact of rising rates and empty buildings on $5.6T market… “Rising interest rates, falling prices, and waning demand for office space following the pandemic had strained the commercial property market. But these troubles intensified after this year’s failures of Silicon Valley Bank, Signature Bank, and First Republic banking crisis raised worries about other regional banks that account for the bulk of commercial real estate loans. ‘The private market hasn’t started to heavily mark down real estate,’ Apollo Global Management co-president Scott Kleinman told the Financial Times. ‘The equity will be first. That’s the next shoe to drop in the US. Like everything else, it has been priced so tightly and there hasn’t been a commercial real estate crisis in the US since the ‘90s.’ Guggenheim Partners chief investment officer Anne Walsh said the pain would be concentrated in certain regions of the US, including large urban centers such as San Francisco and New York, as well as in second-class office buildings that are in need of repair. ‘We’re likely going into a real estate recession’… Walsh noted some lenders were requiring personal guarantees from property owners — in which borrowers pledge their own assets to secure a mortgage — a signal of the tightening lending standards and the fact that banks were pulling back.” – FT, May 9

Economic indicators in the Leading Economic Index (LEI) from The Conference Board fell further in June by -0.7% m/m, worse than -0.6% in May. The YoY decline is -7.8%, which is consistent with previous recessions.

LEI Leading Economic Indicators for June 2023 - The Conference Board

LEI Chart Courtesy of Liz Ann Sonders


Fitch Ratings Downgrades Loom For U.S. Banks Significantly Exposed To CRE Loans… “Presently, the amount of commercial real estate loans, as a percent of banks’ total loans, has grown to being slightly higher than it was in the last quarter of 2007. This worries me. The party at the low interest rate buffet trough eventually ends in tears. We are now in a global environment of much higher interest rate environments. This means that even if the Federal Reserve Bank and other key central banks around the world pause their rate hikes, rates do not just suddenly decline. CRE borrowers will face higher borrowing costs when they must refinance in the foreseeable future.” – Forbes, May 24


The Two Causes of the Coming Great Depression… “Consider CRE, commercial real estate. Office towers are now worth one-third of their pre-pandemic valuations, the valuations on which their mortgages were based. There is no way these properties can be magically restored to their previous over-valuation. Massive losses must be accepted by the owners of the debt. If those losses make them insolvent, so be it. That is unacceptable in a system geared to protect the wealthy at all costs. But bubbles pop anyway, regardless of policy tweaks.” – Charles Hugh Smith, Jul. 17

There’s a lot of talk circulating about converting underused office towers and other commercial buildings into residential real estate. With today’s higher interest rate environment and liquidity drying up due to tighter lending standards, the task of converting the majority of buildings is too expensive and structurally challenging. An article published at Naked Capitalism this week dives into the dirty details about conversions. More often than not, it’s simply not affordable for an owner, investor, or banking institution to risk such undertakings in an economy and geopolitical situation wrought with too many unknowns. Mayors across the country and the bureaucracies they manage are squawking about ramping up conversions with zoning changes and tax abatements, but they seem unaware or oblivious to the fact that there are no rainbows with a quick fix at the end to be had right now.

One factor contributing to the CRE debacle is retail brick-and-mortar stores that occupy a mixed-use commercial property and generate substantial cash flow for landlords. Retailers have already closed more stores than they opened in 2022, and a conservative estimate from UBS Bank expects more than 50k stores to close before 2027. A glaring example of mixed-use CRE is One South Street in downtown Baltimore that had a fire sale last month. The first two floors are a retail mall, and the remaining 28 floors are dedicated to miscellaneous business offices. The building was bought in mid-June by BHN Associates for $24 million, which is $43 million less than it last sold for in 2015. The new owner is a New York investment firm that purchased the property in a short sale because the amount paid was less than the outstanding mortgage. Details about the transaction are still unavailable.

That fire sale sits across the street from Harborplace retail and restaurant mall at the Inner Harbor, which used to be a bustling haven for international tourism. It’s now a vacant ghost town except for one remaining tenant, Hooters. Across the traffic intersection from One South Street and Harborplace is a 355,800-square-foot, 10-story office, and retail tower at 1 East Pratt. It was bought by MCB Real Estate this month for $25 million vs. when Banyan Street Capital forked out $80 million in March 2018.


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Recent fire sales of note include Blackstone selling the Griffin Towers office complex in Santa Ana, CA for $82 million, about 36% less than it paid in 2014. The tower at 350 California in San Francisco was valued at $300 million in 2019 but is expected to sell for 75% less per square foot than its value in 2020. Principal Financial Group sold a Parsippany, NJ office building for $14.3 million, down from the $52 million paid in 2008.

The inventory of office buildings for sale is growing because “investors want out.” There is a major glut of office space sitting vacant in NYC, and landlords are starting to panic and pivot towards unloading nonperforming properties. Employers that used to try to squeeze more worker bees into less space for years are no longer interested in renewing leases. Scott Rechler’s real estate company, RXR, owned more than 22 million square feet of space in 2020. He pointed out that leases are beginning to expire, and employers must rethink their tenancy while staring at a plethora of empty workstations. Rechler describes the CRE office space market in NYC as a “slow-moving train wreck. Right now, it’s doomsday. There’s no lenders; there’s little tenant demand.”

New Glut City… “According to Cushman & Wakefield, Manhattan’s office-vacancy rate is around 22%, the highest recorded since market tracking began in 1984. When you include sublet space, more than 128 buildings in Manhattan currently list more than 200,000 square feet of space as available for lease, according to data from the firm CoStar. The available space in these buildings alone amounts to more than 52 million square feet: the equivalent of more than 40 skyscrapers the size of the Chrysler Building… Before the pandemic, office buildings were trading at prices of around $1,000 a square foot. Buildings slated for conversion go for around $300 a square foot, very roughly. So to make the housing strategy feasible, banks and landlords have to accept that once-profitable properties are worth a fraction of what they once were” – Curbed / New York Magazine, Jul. 17

Worth Less Manhattan Office Buildings - New York Magazine Cover

Worth Less Manhattan Office Buildings – New York Magazine Cover


One of the most fact-filled articles on the current U.S. CRE market is from British legacy media, and an insightful one in the U.S. is Wolf Street.

Inside the office debt timebomb… “Commercial real estate teeters on the edge of financial meltdown as ‘zombie’ spaces dominate areas like San Fran and Manhattan – with owners set to default on billion-dollar loans this year. $1.5 trillion in mortgages will come due within the next two years while office availability in San Francisco soared to 32.7% in 1Q23.” – Daily Mail, Jun. 26


CRE Nightmare for CMBS Holders: Office Mortgage Delinquency Rate Has Biggest Six-Month Spike Ever. It’s just the Beginning… “After blowing through the pandemic with no more than a squiggle, the delinquency rate of Commercial Mortgage-Backed Securities (CMBS) backed by office properties is rising… Office mortgages that had been packaged into CMBS went through a horrendous default cycle following the Financial Crisis, with the delinquency rate topping out at over 10% in 2012/2013. The current six-month 2.9-percentage-point spike from 1.6% to 4.5% is the fastest six-month spike in Trepp’s data going back to 2000.” – Wolf Street, Jul. 5

Office CMBS Delinquency Rate 200 to 2H23 - Wolf Street

Office CMBS Delinquency Rate 200 to 2H23 – Wolf Street


You know it’s getting nasty out there when behemoth JPMorgan is looking to sell a $350 million loan backed by Manhattan’s HSBC Tower because banks are facing increased pressure by regulators to reduce their exposure to office real estate. Case in point is Leser’s 111 Livingston in Brooklyn with a $120 million burning pile of debt dung that was watchlisted in May. Back in April, one of America’s largest office owners, Brookfield, defaulted on a $161 million loan that covered 12 office buildings in the Washington, D.C. market. They joined Blackstone and WeWork defaulting on their debt this year. Visit Visual Capitalist to view a graphic of what the 1 billion square feet of vacant office space in the U.S. looks like.

Commercial Real Estate Loans, All Commercial Banks - FRED

Commercial Real Estate Loans, All Commercial Banks – FRED


CRE market train wreck needs liquidity – RXR’s Rechler on CNBC, Jul. 12



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