After WFH Ends, Office Real Estate Doesn't Seem to See A Significant Boost
After Work-From-Home Policy Ends, Office Real Estate Doesn't Seem to See A Significant Boost
Although we have seen the continuation of a wave of return-to-office mandates that began in 2022, with major employers issuing an array of new policies during the period, things are still worsening in the office leasing market.
■ The supply and demand situation is not optimistic
Recent reports showed that the office vacancy rate hit a 30-year high of 18.2% (released by CBRE) or 20.6% (JLL) last quarter. On the one hand, on the supply side, the number of newly completed projects is still increasing, and on the other hand, the amount of absorption has peaked and declined.
The combination of increasing sublease vacancy and downsizing tenants continued to drive net occupancy loss across the U.S., with an additional 12.5 million s.f. of negative net absorption in the second quarter.
In terms of cities, only Houston, Chicago and other places in the South and Midwest have positive net absorption; for San Francisco, D.C., and Philadelphia from the West and Northeast, the demand is much lower than supply.
■ Falling Prices:
Many US cities have seen a decline in office property rental prices. The rents in San Francisco, Boston, Washington, D.C. and other cities all decreased on a MoM and YoY basis.
Accordingly, property prices have fallen back to pre-pandemic levels.
■ How does it affect commercial real estate institutional investors?
Global fund managers have cut allocations to commercial real estate to the lowest since the depths of the 2008-09 global financial crisis. Firms from Apollo Global Management to Berkshire Hathaway have issued dire warnings about the commercial property market. One property economist, Kiran Raichura with Capital Economics, described the outlook for the U.S. office sector as "particularly bleak."
Liquidity problems within the market have mounted. The first-quarter dollar volume of office investment sales fell to the lowest level since 2010. Maturing office loans that haven't defaulted will face much higher refinancing costs, 40-60% higher than just two years ago, according to CMBS research firm Trepp. Nearly $1.4 trillion in commercial real estate loans are due through 2025.
An analysis by Trepp shows the vast majority of loans in most markets still won't have trouble refinancing. But other markets face big hurdles: 77% of office loans in the Denver market, 62% in the Houston market and 36% in the Washington D.C. market maturing by 2024 may have trouble refinancing.
■ How could CRE affect the banking industry?
A St. Louis Fed's report noted CRE loans make up about a quarter of total loans outstanding for U.S. banks as a whole. But for the universe of community banks—banks with assets of less than $10 billion—they account for nearly half of all loans.
In the Fed's recent stress tests, in a severely adverse scenario of CRE prices falling by 40%, the 23 large banks stood to lose $64.9 billion. Office properties are the most vulnerable type of real estate among CRE.
Overall, default rate for the office sector stood at 4%, well below the 10% touched during the financial crisis, said Kevin Fagan, head of CRE Economic Analysis at Moody's Analytics. Default could tick up to 6% by the end of 2023, Fagan said.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Zul Zulkifli : $Tesla (TSLA.US)$
lightfoot : A crystal ball is needed but until we create a new approach to business it will not return in the way what seemed normal. We disrupted a culture of a way of life. Crime, travel, safety, a what I call a crack in society with diminishing trust in a government we felt sure would be around for many decades. Companies fail because of too fast expansion undermining failing economies, poor government and catastrophic events. Poor economy is a major factor in high crime and deterioration. Poor management and a failure to follow the US Constitution. If you do not know things how can we succeed if we ignore the map of our great founders. Why fix something if it is not broken? In summation, why build an ice cream shop in the jungles of Brazil!
71620996 : This is a great time to invest on the cheap if you are long term. It's clear the work from home is slowly going downwards. Profits will come.
Derpy Trades : I can glean from the material presented that WFH stands for "work from home," but it is generally a good idea to spell out the full term the first time you use an abbreviation. I spent the first 20 seconds reading this article just trying to figure out what you were referring to in the title...
73058385 71620996 : WFH isn't going anywhere, they're just weeding out the idiots that can't function at home. It's not for everyone.
71620996 73058385 : I guess you are blind. The charts show a decline. It is a slow bleed.
73058385 71620996 : Blind? Are you kidding, did you not read what I wrote? it's not dying or going anywhere, they're just weeding out the idiots who can't function at a WFH job. Good lord lol
71620996 73058385 : And clearly you can't read and have a reading comprehension problem. Did you see me say it will completely go away? No. But the data is pretty clear it will go down. And any new recruited will most likely be working in an office since term of the contract may end up being different. Hell I work in an office and know how this shit works. You saying weeding out.. Is the most BS excuse or explanation