One of the biggest changes due to the pandemic is where we work. For many of us, it’s still fully or partially home, leaving behind a huge glut of office space where millions of Americans used to spend 40 or more hours a week.
Demand for offices is so low that there could be as much as 1 billion square feet of unused office space in the U.S. by the end of this decade, according to a report released earlier this year by real estate firm Cushman & Wakefield. It is said that there is. This is nearly 1.5 times the number of office vacancies at the end of 2019, just before the pandemic began.
It took just a few years for the office real estate market to reach its lowest vacancy rate in decades, but it could take much longer to recover. Office vacancy rates are nearing 20%, according to CBRE, and market experts have little faith that the vacancy rate will improve anytime soon.
“It could easily take years for the office market to stabilize, which is why I called this whole thing a slow-motion train wreck,” said Stein van Stein, professor of real estate and finance at Columbia Business School. Neuerberg told Goldman. Sachs said in its Commercial Real Estate Risk Report released Monday. Van Nieuwerburg is a highly regarded European economist who has won the Bernasser Prize, which is given to European economists under the age of 40 who have made an “outstanding contribution” to macroeconomic and financial research.
He predicts doom is imminent for four reasons: First, it’s still unclear whether some pre-pandemic leases will be renewed. Office leases are on average seven years long, so it will take several more years for all pre-pandemic leases to end, he explained.
“Many tenants have not yet made active space decisions and are waiting for their leases to expire in order to reduce space or negotiate better deals,” he said.. “Both are bad news for landlords’ cash flow for years to come.”
Second, if vacancies continue to increase, rents are likely to fall. Julie Whelan, global head of occupancy research at CBRE, previously said office vacancy rates are at their highest levels in 30 years. luck. Although reductions in office rents have been “surprisingly small,” Van Neuerburgh expects “downward pressure on market rents to increase in the near future.”
Another factor in the impending doom is that homeowners will have to refinance their mortgages. Typically, the landlord takes out a 10-year mortgage on her and refinances it at the end of the loan term. With mortgage rates at multi-decade highs, homeowners are now feeling even more financial pain when refinancing.
“Interest rates have more than doubled, there are cash flow issues due to vacancies, and building values are falling due to hybrid working and rising interest rates,” Van Neuerburgh said. “All of this means lenders are less willing to roll over debt.”
Finally, Van Neuerburgh explained that council tax assessments are completed infrequently, which can cause delays in determining the value of commercial properties. For example, rather than determining the value of commercial real estate based on recent comparable sales, New York City determines value based on the most recent five years of income and expenses, according to the New York City Department of Finance. .
This means that to turn the office market around, we need to return to the corporate norm of cubicles and commuting. And that will only happen if companies decide that the current post-pandemic reality is bad for worker productivity.
“There should be near consensus that hybrid and remote policies have uniformly negative consequences for businesses,” Van Neuerburgh said.
Although the overall outlook for office space is bleak, more commercial real estate investors are considering and investing in converting buildings to other uses, particularly office-to-residential projects.Repurposing office space for multifamily housing could alleviate supply shortages Estimated 2 million to 6 million homesaccording to Morgan Stanley.
According to research released in July by Deloitte, there are more than 200 office-to-residential projects underway in the U.S., but there’s still a lot more that can be done.
“If you look at the area that has been converted since 2016 and the area that will be converted by 2025, that’s only 90 million square feet,” Whelan previously said. luck. “So that’s what I mean when I say that the transformation that has taken place and is currently underway is really just a drop in the empty bucket.”
But Van Neuerburg says conversion is limited because only about 10% of downtown office buildings with “significant vacancies” are viable for such projects. This has expanded beyond residential uses to mixed-use spaces, medical offices, student housing, daycare centers, and even pickleball courts.
“Not all conversion projects make economic sense,” he cautioned.
