A large number of office buildings have been vacant as "time bombs" in Europe and the United States, and the US media: like dark cracks running through the global economy

Source: Global Times

"The financial storm hits US commercial real estate", on the 25th, the British "Financial Times" published a long article with this title. With construction loans maturing amid a credit crunch, the long-awaited reckoning is coming. The Washington Post said that with the end of a decade of low-interest loans, commercial real estate has become the focus of the next crisis in the eyes of investors. Bloomberg said, "After the pandemic, empty office buildings are turning into debt time bombs. "From London to New York, owners of flashy office buildings are shirking their debts. Will the declining office market really detonate the thunder of commercial real estate? If it happens, how harmful is it?

Record vacancy rate

In San Francisco, the downward trend in the housing market intensified as one office building after another defaulted. Home prices in this U.S. tech hub have reached record highs over the past 10 years, so there's plenty of downside. In New York, while the streets are crowded with tourists and residents, only about half of office workers return to their desks. According to Bloomberg, New York's office vacancy rate is expected to reach a record 22.7% this year.

In London, England, Canary Wharf is currently in trouble. This neighborhood, which most people see as a banker, is losing customers. The British "Times" reported on the 26th that HSBC decided to move its headquarters from Canary Wharf to the former British Telecom Group headquarters. According to property analyst CoStar, the vacancy rate of office buildings in the UK has risen by 65% in the past three years, and there are currently more than 10 million square meters of vacant space waiting to be rented or sold. One-third of the vacant office space is located in London, in addition to Manchester, Birmingham and Glasgow, which each have about 460,000 square meters of spare office space. Such a high level of vacant office space set the UK's worst business performance since 2014. According to the report, although the office rental market in the UK is bleak, the market is still in demand. Stanfield, CoStar's senior director of data analytics, believes that what is needed is smaller, greener and more energy-efficient office space.

According to Bloomberg, the decline of commercial real estate is spreading around the world, like a dark crack running through the global economy. Even if the stock market rebounds, the problems in the housing market will continue for years.

Recovery time may take 15 years

According to the Financial Times, some real estate agents estimate that the total market value of New York office buildings has fallen by $76 billion from its peak. Except for a very small number of new high-end office buildings that can still be rented at high prices, other office buildings are facing the problem of difficulty in leasing. When the owner was about to sell, he found that the office building purchased at a high price earlier was now falling in price. For example, Blackstone and RXR recently sold their office properties at 1330 Avenue Americas in New York for $320 million, one-third lower than the 2006 purchase price. A real estate professional said that in absolute dollar terms, commercial real estate prices in New York have fallen to their lowest level in nearly 20 years, and some properties are sold at lower prices than vacant land.

Data from data analysis firm Green Street shows that since the Fed began raising interest rates in March 2022, the volume and price of US commercial real estate, especially office buildings, have fallen sharply. The value of institutional-grade office buildings fell by 27%, apartment prices by 21%, and shopping center prices by 18%.

Prudential Real Estate Investment Management expects office prices in Europe to fall by more than 25% and office prices in Asia Pacific by nearly 13% before bottoming out. Analysts at the agency believe the "big reset" in commercial property values could be extremely slow. After the 2008 financial crisis, it took 6 years for U.S. office prices to recover. Capital Economics predicts that U.S. office prices will fall 35% from their peak by the end of 2025 and take 15 years or more to recover. As demand for office space wanes, U.S. office buildings are unlikely to return to pre-pandemic peak levels by 2040.

Zhao Xiuchi, dean of the Beijing-Tianjin-Hebei Real Estate Research Institute of Capital University of Economics and Business, told the Global Times reporter on the 26th that the recovery prospects of office buildings and commercial real estate in European and American cities depend on whether their central banks will raise interest rates in the future and macroeconomic and inflation. In the short term, interest rate hikes, inflation and other factors have increased the cost of office buildings and commercial real estate, which is not conducive to the recovery of office buildings and commercial real estate.

Wei Dong, head of research at Cushman & Wakefield's North Region, told the Global Times that the office market is currently one of the most challenging sectors in commercial real estate in the United States, and the contraction of demand due to changes in corporate office models and the increase in the difficulty of refinancing will bring greater uncertainty to the recovery of the office sector, and it is difficult to see signs of market recovery in the short term.

Financial turmoil?

According to the Financial Times, after the new crown epidemic, US mortgage interest rates continue to rise, and property owners who originally bought office buildings with floating rate loans are under serious pressure. The rise of remote work has made it more difficult to rent out properties. Under such circumstances, many property owners seek to save themselves by refinancing, while others completely "lie flat" and no longer repay their loans, allowing their houses to be foreclosed.

According to Bloomberg, according to the American Mortgage Bankers Association, about $1.4 trillion in commercial real estate loans are due in the United States this year and next. When the final repayment deadline comes, owners facing large bills may be more willing to default than borrow again to pay their bills. Because of the high cost, asset managers such as Blackstone Group and Pacific Investment have chosen to stop paying for some construction.

For commercial real estate, refinancing is currently the biggest problem, and maturing loans must be financed at higher interest rates, which means that even if the vacancy rate rises or remains high, its holders will have to pay a higher amount. Small and regional banks, the largest source of credit in the U.S. commercial real estate market, hold about 80 percent of the industry's outstanding debt, and are currently at the center of financial turmoil, significantly raising lending standards as banks try to reduce financial risk, making it difficult for businesses or households to obtain loans. If a prolonged decline in the value of commercial mortgages causes deposits to flow out of banks, banks are forced to restrict lending not only to developers, but to all customers. In extreme cases, this can threaten the banks themselves, creating systemic risk.