With more people working remotely, commercial real estate is facing an increasingly dire situation, and some real estate experts say the market is being sharply split “into the haves and have-nots”.
San Francisco is on the brink of an “epic commercial real estate crash,” according to the San Francisco Standard, which warned of an approaching train carrying “the city, its budget, and its ability to provide track-related services.” In New York, “remote work is killing Manhattan’s commercial real estate market” Bloomberg tweetedand similar problems extend to other cities.
A recent study by NYU professor Arpit Gupta and his colleagues is predicting an “office real estate apocalypse” as research points to a 39% long-term decline in office values, equivalent to “$453 billion in value destruction.”
Using data from New York City, the study estimated “a 45% decline in office values in 2020 and a 39% long-term decline, the latter representing a $453 billion loss in value,” putting the city in a “fiscal doom loop.” could fall. Similar damage could affect other cities and thus also the national economy.
How do we use the available data? CommercialEdge’s monthly National Office Report for September found that average office ad prices were flat at $38.70 per square foot, down just 0.1% year over year. Bad but not apocalyptic. Some cities have strong rental markets, particularly in the sun belt or in regions with strong life science industries.
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What other data shows
Moody’s Analytics, which provides economic research as a subsidiary of Moody’s Cooperation, documented that commercial mortgage-backed securities saw “a huge spike in default rates” in the second quarter of 2020, according to Moody’s Analytics. But banks, life insurance investors and others have restructured loans and offered leniency, lowering their default rates. This strategy will be more difficult to follow if the office market comes under renewed pressure, particularly if the Fed hikes interest rates and borrowing becomes more expensive.
So far, the commercial banks seem to have their real estate loans under control. Their write-off and default rates reached 0.07% in the second quarter of 2020. But for the first two quarters of 2022, the Fed is reporting those rates at zero, which doesn’t signal a dramatic decline in credit quality.