US Office Buildings See 30% Price Decline, Primarily Due to Remote Work Trend

Office buildings in America are facing a 30% peak-to-trough market correction, as per Morgan Stanley. The bank said that "there's a lot of pressure weighing on the office building market, with prices falling around 20%." This is mostly because of the rising trend to work from home post-pandemic even after things have returned to the pre-COVID norm. As per the bank, this pressure is likely to fade and will spark a 30% peak-to-trough correction in office prices.

"Office as a property type is confronting a secular challenge," the bank said in a note on Sunday. "We are unlikely to see demand for office properties returning to pre-pandemic levels. This means that property valuations, leasing arrangements, and financing structures must adjust to the post-pandemic realities of office work. This shift has begun, and there is more to come."

Late payments on office-backed loans have also surged to 6.5% in Q4 of 2023, as reported by Mortgage Bankers Association. The commercial real estate surge has been a source of distress for the US banking sector and all the regional banks, in particular. Many believe that smaller lenders will soon face immense pressure due to billions of dollars in defaulted mortgage debt, leading to a significant decline in the shares of New York Community Bank last week, with a plummet of approximately 60%.

"As long as interest rates stay high, it's hard for the banks to avoid problems with CRE loans," said short-seller William C. Martin of Raging Capital Ventures. "Regional banks with office prominent in their CRE exposures will face more challenges. Banks with higher exposure to CRE tend to have a lower CRE reserve ratio."

The strain in the commercial sector has extended to German lenders as well. According to the NSCI Real Assets report cited by Fortune, the value of buildings in bankruptcy surged by a net $5.6 billion in Q3 of 2023. Since then, the situation has only deteriorated, potentially prompting the Federal Reserve to consider a rate cut.

Komal Sri-Kumar, president of Sri-Kumar Global Strategies, believes that there's a bigger risk ahead."I have been saying for the past year that it is systemic, and it has been building up. I think we are reaching a crescendo right now," he said.

"We witnessed the fallout in China with Evergrande and its liquidation, plunging the property sector into a deep dive. The commercial real estate challenge has now extended to Europe and Japan as well. That's why I believe it's systemic, and I'm puzzled as to why the Treasury Secretary claims otherwise," he added.

Real estate experts have been raising concerns about commercial real estate since early 2023 when the sector garnered attention following regional bank collapses. They believe that certain office buildings could become virtually obsolete due to conflicting demands, potentially leading to demolitions.