JAN 28, 2025
The commercial real estate market, particularly office buildings, is facing growing challenges as hybrid work becomes the norm and interest rates remain high. Many property owners in major cities like New York and San Francisco are experiencing significant financial strain, with buildings selling for far less than their pre-pandemic valuations. The situation highlights the long-lasting effects of the pandemic on the office market and raises questions about its future stability.
Since the pandemic’s onset, property owners have hoped for a rebound in demand as workers returned to offices. Four years later, hybrid work is entrenched, leaving many office buildings underutilized. Older buildings with substantial vacancies and looming loan repayments are especially vulnerable. Foreclosures and distressed sales are becoming more common, with some properties selling at steep discounts compared to their values a decade ago.
In May 2024, for example, the office building at 1740 Broadway in New York, originally purchased for $605 million in 2014, was sold for under $200 million. This underscores the sharp decline in commercial property values in some cases.
Weak demand for office space remains a major issue. New leases are down approximately 25% compared to 2019, and average office occupancy in New York is about 50% of the pre-pandemic workforce, according to Kastle Systems. The delinquency rate for office loans tied to commercial mortgage-backed securities (CMBS) rose to nearly 7% in May, up from 4% the previous year. Foreclosures are also climbing, with nearly 30 office buildings in cities like Dallas, New York, and San Francisco in foreclosure as of April 2024.
Many office building owners financed their properties at low interest rates pre-pandemic. As loans mature and refinancing at today’s elevated rates becomes necessary, the financial burden increases, especially for buildings already struggling with high vacancies. Recent sales reflect severe devaluations. A Washington D.C. office building sold this spring for $16 million, a sharp decline from its $72 million valuation in 2018. These losses are making lenders and investors more cautious about financing office properties.
The repercussions of declining office property values extend beyond building owners and lenders. Cities that rely on property tax revenue, like New York and San Francisco, face potential budget shortfalls as commercial valuations drop. Additionally, empty office buildings hurt nearby businesses, including restaurants and shops, that depend on office workers for revenue.
Despite concerns, newer “trophy” buildings are faring better. These high-end properties, often commanding rents of $100 per square foot or more, remain in demand. However, older buildings, especially those with significant deferred maintenance or outdated designs, face steep challenges.
Analysts expect the situation to worsen before improving. The office market’s recovery is likely to be prolonged due to long lease terms, high interest rates, and the slow process of loan renegotiations and foreclosures. About a quarter of existing office property mortgages, totaling over $200 billion, are set to mature this year. Many owners may struggle to refinance under current conditions.
The commercial real estate sector’s reliance on strategies like “extend and pretend” — extending loans in hopes of future recovery — is being tested as high rates persist and occupancy rates stagnate. While some banks and investors have limited exposure, the losses in the office market are mounting.
Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.
