Remote work costs U.S. offices $24.8 billion—more than malls and hotels
Remote work is causing significant financial distress for U.S. offices, surpassing the negative impact on malls and hotels. The estimated cost is a staggering $24.8 billion.
At the end of the second quarter, U.S. office buildings faced a significant financial challenge, with approximately $24.8 billion in distress. This amount exceeded the financial difficulties experienced by hotels and retail properties, which were previously considered the leading laggards in the commercial real estate sector.
According to a report by MSCI Real Assets, the total value of offices facing financial difficulties or already repossessed by lenders has increased by approximately 36% since the first quarter.
As of the end of June, retail properties, including malls worth $22.7 billion and hotels worth $13.5 billion, faced financial difficulties. The combined value of distressed commercial properties reached nearly $72 billion, marking a 13% increase compared to the previous quarter.
According to a report, the office sector had the highest amount of distress in the market. The data came from filings for bankruptcies, defaults, and other publicly reported property issues. For the first time since 2018, the retail and hotel sector has yet to be the most significant contributor.
According to MSCI, a new report states that $162 billion worth of properties are facing potential distress. These properties are dealing with issues like late loan payments, high vacancy rates, or coming due debt.
Office conditions are probably to deteriorate further. Investors are not optimistic about the likelihood of debt becoming inexpensive and everyone returning to the office as they did in the past.
U.S. office spaces are experiencing increased stress compared to other real estate types due to a decline in demand caused by the growing acceptance of remote work. According to data from Kastle Systems Inc., office usage in 10 major US cities is currently at approximately 50% of its pre-pandemic levels. According to a brokerage firm Jones Lang LaSalle Inc. report, over 20% of office space in the United States was unoccupied as of June 30.
According to real estate analytics firm Green Street, the prices of office buildings dropped by 27% in the year leading up to June. This decline is higher than the overall commercial property market, which experienced a 12% decrease. Major corporate landlords, including Blackstone Inc., Brookfield Asset Management Ltd., and Starwood Capital Group, have decided to halt payments on office buildings that they consider unprofitable.
Office properties with debt coming due are at a higher risk of facing difficulties because the cost of borrowing money has increased significantly since the Federal Reserve began raising interest rates to control inflation. According to the Mortgage Bankers Association, an estimated $189 billion of debt on office buildings will mature in 2023. Additionally, an additional $117 billion of debt is due in 2024.