Office Real Estate Market on Life Support After COVID-19 Lockdowns, Soaring Interest Rates
The Trends Journal warned about how the COVID-19 lockdowns would devastate the industry that will not recover.
LOS ANGELES-- Since the start of the COVID-19 outbreak and decision by power-mad politicians to lock down entire cities, The Trends Journal has warned that the commercial real estate industry will suffer enormous pain.
Companies realized that they do not need to have workers inside expensive, state-of-the-art office spaces. Like any sinking industry, it will become the survival of the fittest.
Some creative landlords will meet city-dwellers’ need for experiences by opening their empty office space to yoga studios, music academies, coffee houses, adult education centers, and other service-oriented enterprises.
These landlords will find interested partners in city agencies that will need to provide waivers or changes to zoning ordinances, building codes, and other regulations to accommodate these new tenants.
However, landlords will be stuck holding many buildings, even newer ones, unable to pay their way. Eventually, the owners will default on their taxes or mortgages. Ultimately, cities will wind up owning portfolios of empty office buildings that no one can afford to keep up.
Take a look at an article in Monday’s Financial Times titled, “New York’s ‘Zombie’ Office Towers Teeter as Rising Interest Rates Add to Pandemic Pain.”
The paper spoke to Doug Harmon, the chair of capital markets at Cushman & Wakefield. He said these days his job is largely focused on performing “triage.”
“There’s a consensus feeling that capitulation is coming,” he said. “Everywhere I go, anywhere around the world now, anyone who owns offices says: ‘I’d like to lighten my load.’”
Of course the pain is not limited to New York. A restaurant worker in Century City, Los Angeles, told The Trends Journal recently that there is “zero percent” occupancy inside his office tower in the heart of the city.
In Atlanta, Boston, New York, San Francisco, and other U.S. business hubs, office occupancy remains well below 2019 levels, according to The Wall Street Journal.
Occupancy is now a meager 53 percent in Dallas, 57 percent in Houston, and 62 percent in Austin, according to Kastle Systems, a security firm that tracks swipe card use.
Consequently, when leases expire, companies either negotiate for less space or let space go entirely.
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The amount of office space leased during this year’s third quarter was almost a third less than during the same period in 2018 and 2019, according to real estate services firm Avison Young.
Millions of square feet of office space across the U.S. are now vacant, with the vacancy rate at a record 19.1 percent, Jones Lang Lasalle, a research service, reported.
The amount of empty space in Chicago, Houston, and San Francisco has climbed above 20 percent, with midtown and downtown Manhattan setting a record 20.2 percent.
“These are older buildings in the canyons of Wall Street,” Franklin Wallach, managing director at brokerage firm Colliers, told the WSJ. “We’re seeing large vacancies not because of one single tenant but tenant migrations that are all hitting at once.”
With borrowing costs rising and the economic outlook darkening, commercial landlords and real estate investors are finding it harder to find financing.
Rising interest rates, energy prices climbing, and the shift to remote work all have routed the commercial property market, which began the year with optimism that has steadily disappeared as lenders, unsure of what lies ahead, have cut back their exposure to commercial real estate.
The real estate and financial industries, along with municipal governments, are struggling to figure out what to do with office buildings that are largely empty or with downtowns seeing a fraction of their past commuting workforce.
Municipalities lie under the wreckage. Property taxes make up half or more of most cities’ revenue and taxes are based on property values.
Empty storefronts and less-valuable office towers shrink the tax bases cities need to pay for services—and fewer services make a city a less-desirable place to live, driving residents out (as happened during the COVID War) and reducing revenues even further in a downward spiral.