This phenomenon is not recent, as many buildings have remained vacant for four years since the onset of the COVID-19 pandemic. Initially, owners hoped to weather the storm, but with slow return rates of workers, companies have downsized, leading to soaring vacancy rates, particularly in older buildings. Compounding the issue, rising interest rates are looming over the horizon, with a substantial portion of commercial building loans set to be refinanced while rates remain uncomfortably high. Approximately $1 trillion in American commercial property loans are due for refinancing within the next two years, representing a significant portion of the total debt owed on commercial properties.
Recent trends show several office buildings in major cities trading at prices well below their pre-pandemic levels. These dramatic losses are poised to erode owners' equity, leaving financial institutions to bear substantial losses. Several institutions, including New York Community Bank (nycb), Aozora Bank, and Deutsche Pfandbrief, have already faced significant challenges due to their exposure to troubled loan portfolios. Additionally, the escalating property crisis in China could further exacerbate the situation, potentially leading to a domino effect as investors seek to sell overseas assets to raise funds.
Despite the visible challenges in the commercial property market, it's important to contextualize these issues. Although the problems at nycb are unique to the institution, the impact on offices, while severe, is not likely to pose a systemic risk. American property values, which include residential and commercial real estate, total $66 trillion, with commercial properties, including offices, retail spaces, warehouses, and multi-family buildings, accounting for approximately $4 trillion or about 6% of the total property value. In comparison to the residential real estate downturn between 2007 and 2009, which resulted in a loss of one-third of its value, the commercial property market's impact, even in extremis, would be significantly lower.
Furthermore, lenders are better shielded against losses in commercial property than they were during the residential real estate crisis. While ambitious commercial property loans typically cover just 75% of a building's value, residential loans often approach 100% of the property's value, making the former less vulnerable to significant losses.
While the challenges in the commercial property market cannot be overlooked, they are unlikely to cause severe and lasting damage to the economy. Regulators are actively monitoring the situation, and the growing economy offers additional insulation against a full-blown crisis. Despite the disquieting scenes in empty skyscrapers, the bustling streets, thriving shops, and vibrant restaurants in America signal a healthy and up-and-coming economy that can weather this setback.
Across the United States, empty office buildings are leaving once-bustling downtown areas with less foot traffic and are forcing experts, residents, and officials to figure out what exactly will happen with these vacant structures.
A recent study from the real estate firm Cushman & Wakefield found that about a fifth of U.S. office space was vacant as of the end of last year. The vacancy rate varies, with cities like Los Angeles, Houston, and Cincinnati hovering around 25% and cities like Savannah, Ga., and Naples, Fla., coming in under 5%.
The high rate of vacancy is about more than just the shift to a work-from-home culture because of the COVID-19 pandemic, according to David Smith, the head of Americas Insights at Cushman & Wakefield, who authored the study.
"It's really four factors over the last few years that have impacted office occupancy," he told NPR. "One is we've had a lot of economic uncertainty going back to 2020 and early 2021 and then, again, certainly over the last year as interest rates have risen."
Smith also factors in remote and hybrid work, the surplus of new constructions that are more appealing to office seekers and a pivot to subleased space to help offset the costs of owning office real estate.
Despite these challenges, Smith is optimistic that vacancy is reaching a peak and that a return to office spaces is imminent for two main reasons.
"One is we expect to see job growth accelerate when we head into 2025 and beyond and that office-using industries in particular will take up a disproportionate share of new jobs that are created," he said.
"And two, we're tracking several hundred different companies and their policies around in-office work. And all of them, if they've changed their policies over the last couple of years, are actually moving towards having people in more."
An uncertain return to the office
The debate around return-to-office policies has been playing out for well over a year now, as bosses and workers navigate what a post-pandemic world should look like.
Across the private sector, in-office requirements were becoming stricter, NPR's Andrea Hsu reported in September, echoing what Smith's policy tracking has found.
"What we've found is, people have enjoyed coming back to the office," Zoom's chief people officer, Matthew Saxon, said last year. "There is a buzz. There's something about being able to go have lunch with your teammates."
Zoom is just one company on a growing list that is veering away from remote work by bumping up weekly mandatory days in the office for employees. Some other companies have started requiring employees to move near office hubs and have begun eliminating fully remote positions.
This is despite some workers reporting higher levels of job satisfaction, work-life balance, and productivity when given the choice between working remotely or in the office, and some researchers saying that an in-office presence has not helped big companies make more money.
A possible pivot away from office space altogether
As the U.S. faces a well-documented housing problem and as office-building landlords face a vacancy crisis, some people have begun exploring whether there could be a mutually beneficial resolution for the two groups — converting empty buildings into residential housing.
San Francisco officials, for example, relaxed rules for some office-to-residential conversions. In Washington, D.C., the mayor proposed bigger tax breaks for office conversions.
Yet converting spaces has proved expensive, complicated, and time-consuming, with the process often also steeped in bureaucracy. It's also harder to do for buildings constructed after 1950, according to Robert Fuller of the architecture firm Gensler.
"A lot of the kind of older prewar office buildings have already been converted and tend to work fairly well," Fuller told NPR last year. "What we're seeing now is a flood of buildings built in the '50s, '60s, '70s, '80s that were much deeper. The advent of air conditioning and fluorescent lighting allowed these much larger floor-plate buildings, and those tend to be a little bit more challenging."
That's because the center is often darker and doesn't get sunlight, which makes conversion into homes harder.
As for Cushman & Wakefield's Smith, he says the office will continue to be part of the U.S. landscape for decades to come.
"I think the long-term trajectory is that the office is a central part of the economy," he said.
"I think this is an opportunity for the office market as well to redevelop itself. And actually, in 10 or 15 years, we'll look back and the office market will have revolutionized itself in a really exciting way."