Monday, August 21, 2023

Everyone thinks there will be a recession. I’m not sure because I think consumer spending could keep us afloat. But there is another brewing crisis that could plunge us into a recession: commercial real estate vacancies.

During the first three months of 2023, U.S. office vacancy topped 20% for the first time in decades. In San Francisco, Dallas, and Houston, vacancy rates were as high as 25%. Office attendance in some of the 10 largest business districts is still half of pre-COVID levels as white-collar employees spend an estimated 28% of their workdays at home.

These statistics only cover real estate that’s no longer leased. Troublingly, many office leases were signed before the pandemic and have yet to come up for renewal. When they do (a third of all office leases expire by 2026), it’s likely demand for office space will be lower. Then we can expect higher vacancies, significantly lower rents, or maybe both.

We could even see landlords returning properties to their lenders. Over the past few months, big property conglomerates have defaulted on billions of dollars in commercial properties loans. That’s quite unlike the strong commercial property loan market in recent years.

But today things are different. Vacancy rates are high, interest rates have doubled, and nearly $1.5 trillion in loans is due for repayment by 2025.

Banks and municipal governments have reason to worry too. Regional banks account for nearly 70% of all commercial property bank loans. And property taxes underpin city budgets. In New York, for example, property taxes generate 40% of all tax revenues.

It’s now a bit more understandable why the push to get back in the office is happening. Some cities (and banks, indirectly) need workers to be at work.