US office owners get dire warning: Rebound unlikely before 2040
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The office property market is struggling with weaker demand, given the rise in remote work, job cuts, and higher interest rates.
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Los Angeles - United States office buildings are unlikely to regain their peak pre-pandemic values until at least 2040 as demand for desk space weakens, according to a forecast by Capital Economics.
Values are expected to plunge 35 per cent from the peak by the end of 2025 and take an additional 15 years or more to recover as hybrid and remote work reshape real estate, the London-based research firm reported on Thursday.
It is a trend that mirrors the collapse of shopping malls as e-commerce grew.
“Demolitions and conversions of the worst assets may partially counteract the impact on valuation-based indices,” economist Kiran Raichura wrote.
“But ultimately landlords will have to bear those costs, so the road ahead for office owners is set to be an arduous one.”
Major institutional investors, including Brookfield and Blackstone, have already defaulted on some office buildings, choosing to stop loan payments rather than spend more on money-losing properties.
Distress is spreading in the US commercial real estate industry, with the amount of troubled assets climbing to nearly US$64 billion (S$86 billion) in the first quarter of 2023.
The amount of distressed assets rose 10 per cent in the first three months of the year, according to a new report from MSCI Real Assets.
Risks loom on the horizon too, with nearly US$155 billion of commercial property assets that are potentially troubled, stated the report.
Higher borrowing costs have pummelled the commercial real estate industry, driving prices lower and causing some owners to choose to default.
Much of the potential distress is tied to buildings that need refinancing at a time when lenders are tightening credit following the collapse of several regional banks.
Offices, which are also struggling with weaker demand given the rise in remote work and job cuts, account for nearly US$43 billion of potential distress, the most of any sector.
Offices face a bigger wave of maturing debt while distress in retail “appears to be cooling”, said the report.
Office usage is only about half what it was before the Covid-19 pandemic, according to badge-swipe data from Kastle Systems.
Available space for lease in cities such as San Francisco and Atlanta has climbed to 30 per cent, the brokerage Savills reported.
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