Which Cities Are Seeing the Sharpest Decline in Office Values Thanks to Remote Work Arrangements?

It’s no secret that a growing number of people and companies are choosing remote work arrangements. The percentage of people working from home grew from 9 million in 2019 to 27.6 million in 2021. What’s more, experts believe there will be over 36 million American remote workers by 2025. Naturally, this is taking a huge toll on the office real estate sector, putting a strain on companies, landlords, and real estate investors who are now struggling to find tenants. Even so, some cities have taken a worse hit than others.

San Francisco has been particularly hard hit by the transition to remote work. A third of the city’s offices sit vacant. The Institute of Taxation and Economic Policy predicts San Francisco’s commercial property market could lose up to 43% of its current value. Companies are struggling to shed commercial offices by selling them at a steep loss in order to avoid default. For instance, a 22-story office tower valued at $300 million in 2019 is now for sale for a mere $60 million. Clarion Partners is selling its office building for only $55 million. This is only about 50% of what the company paid for the building ten years ago. At the same time, the default rate is surging as companies struggle to shed liabilities rather than sink money into investments that won’t turn a profit. Swift Real Estate Partners defaulted on a loan of over $62 million last month. Columbia Property Trust recently defaulted on a $1.7 billion loan on seven buildings, including two office buildings on San Francisco’s iconic California Street. The outlook is set to get even worse as about $2 billion in loans are coming due this year and another $2 billion are coming due in 2024.

Los Angeles’ office has lost up to 55% of its value, according to Boston Consulting Group. Downtown LA’s Class A office space alone has lost a whopping $4.6 billion. KBS, which bought Union Bank Plaza for over $200 million in 2010, recently sold it for only $110 million. The PacMutual building lost 20% of its value since 2021. Bidders on Shorenstein’s Aon Center will likely offer 40% less than they did when the same building was up for sale in 2014. Furthermore, Brookfield is defaulting on over $1 billion in loans. This means two of its office buildings will go into receivership. Others may soon follow in its footsteps. More than one in five office loans are set to mature in the next three years and many lenders aren’t eager to offer refinancing.

New York has been hard hit as well. The city’s northern suburbs had an office vacancy rate of almost 25% at the end of 2022. The Institute of Taxation and Economic Policy predicts that the Big Apple’s commercial space will lose 40% of its value. Researchers state that the city’s office stock lost $69.6 billion in value from the end of 2019 to 2022. As a result, large companies that own office buildings are struggling to refinance loans in order to avoid default. Aby Rosen, the owner of New York’s iconic Seagram building, was unable to refinance his $1 billion mortgage on the building but did manage to negotiate an extension. Tishman Speyer, which owns 300 Park Avenue, is likewise hoping to request a loan extension before its loan comes due in August.

The impact of remote work on the office real estate sector is undeniable. The labor shortage has forced many companies to offer better terms and conditions to expert workers, and the ability to work from home is a sought-after benefit. As a growing number of people refuse to spend long hours commuting to and from work, office real estate values will likely continue to drop across the nation. Even so, investing in office space as prices drop isn’t necessarily a bad idea. With careful research and planning, an inventor could turn a high profit on unused office space in ideal areas by converting the space into mixed-use developments. Buildings that once housed offices could again come to life after they are repurposed as apartment buildings that also house small businesses ready and waiting to meet consumer needs and demands.

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