Inflation in the new era of remote work is creating a global commercial real estate “apocalypse” where zombie properties sit vacant and owners with loans coming due hand their keys back to lenders, according to experts.
“The apocalypse that’s facing commercial real estate at this moment is all about interest rates and debt maturities,” Harold Bordwin, a managing director at Keen-Summit Capital Partners, a New York firm specializing in assisting distressed properties, told The Post.
“Even if you have a building that had all of the same tenants and all of the same income it had three years ago, if your debt is maturing today, you have a real problem,” Bordwin added.
While these spaces don’t skimp on the square footage, the the inflation wave that crested at a 40-year high last year and remains raised has owners scurrying.
In addition, the Federal Reserve’s continued tightening to reach its 2% inflation goal has increased the returns on risk-free government bonds, forcing commercial real estate investors to demand more yield to simply justify holding the physical asset, Bloomberg reported.
The proof is in the vacancy: Just last week, the owners of downtown San Francisco’s largest shopping centers abandoned the lot after 20 years.
Unibail-Rodamco-Westfield said late on Monday it will transfer its Westfield San Francisco shopping mall to lenders as the shopping center continues to face declining sales, occupancy and foot traffic.
US offices are also plagued by emptiness, prompting landlords to hand keys to their properties over to lenders that are worth less than the debt secured against them, according to Bloomberg.
Earlier this month, a study released by economists from NYU Stern Business School, Columbia Business School and the National Bureau of Economic Research showed that vacancy rates are at 30-year highs in many American cities.
In New York City, the vacancy rate was an eye-watering 22.2% in Q1 of 2023.
The study predicted that rates would plunge even further later this year as prices are certain to go down the drain.
Lower values means less tax revenue. In the case of the Big Apple, the paper predicted a 6.5% drop by 2029.
To plug the hole, cities will raise taxes and fees in other ways — making the city less attractive to live in, which means even less revenue.
San Francisco — a hub for Big Tech — meanwhile, has already seen companies like Salesforce, Tesla and Oracle, among others, taking their leasing dollars elsewhere.
When Salesforce — a software company that’s San Francisco’s largest private employer — has made three separate announcements since 2020 of plans to slash the office space it owns in the city.
The consequences have been devastating for the California city, where office workers accounted for 72% of the area’s GDP — $531.28 billion in 2019 — before the pandemic.
Bordwin said lenders are going to be faced with the choice of “pushing mark to market” or “extending and pretending.”
Mark to market was a tactic used in the savings and loan crisis of the ’80s and ’90s, Bordwin told The Post, where stress debt was cleared by asking, “Who will buy this at what price?”
“Things were sold at pennies on the dollar, and regulators made their way through that inventory,” he said.
Another option would be the “extend and pretend” tactic that was used during the financial crisis of 2008, where borrowers “take loans, allowing banks not to think about what collateral is really worth,” Bordwin explained.
However, “there is just a massive amount of obsolete space,” the real estate expert said, noting how the pandemic shifted the way of the workforce to remote and hybrid models.
“Nobody has a great answer to how that could be dealt with,” he added, noting that “a portion of these buildings could end up getting knocked down eventually” if they’re deemed unable to be converted into residential or lab space.
The vacancy problem isn’t unique to the US.
In Hong Kong — where gleaming office towers are some of the most expensive commercial real estate in the world — a record 13 million square feet of office space sat empty in June and 15% of the most valuable space was vacant, Bloomberg reported.
Billionaire Li Ka-shing’s 63-story Cheung Kong Center sits about 25% vacant.
Meanwhile, two “trophy” office buildings in London are now in the hands of lenders, according to Bloomberg.