How the home office can generate a real estate crisis

2023-06-17 14:05:00

The building at 555 California Street, in San Francisco, houses the offices of large companies and banks, and is emptier than ever. The decrease in the number of people is part of the challenge for companies to bring employees back from home office after the pandemic. The effort isn’t working so well, and the empty housing numbers could be the start of a commercial real estate and banking crisis.

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Home office: post pandemic trend

• People who work in the building and spoke on condition of anonymity to the The Washington Post told how they had never seen the building so empty. The sources also describe how commercial real estate in the area is having to lower rental prices to attract customers.
• This happens because most of the employees in these shopping centers do not want to return to face-to-face work, which also reduces movement in the shops and services around these locations.
• According to CBREa US investment company, office occupancy in the city is around 30%.
• Already according to The Wall Street Journaloffice tower 350 California, one block from 555 California, sold for $60 million — 80% less than it sold four years ago.
• While some companies have accepted this and embraced remote work, others are still resisting and facing the challenges of empty offices.
• Despite the debate about the occupancy levels of these spaces, experts say that the number will never return to what it was before 2020.

555 California Street in San Francisco (Image: Vornado Realty Trust)

Beginning of the real estate crisis

555 Californa Street, owned by the Vornado Realty Trust and the Trump Organization, is home to companies including Kirkland & Ellis and Morgan Stanley bank, and even then it is having a hard time paying the bills: the co-owners have asked for more time to pay off the US loan. $1.2 billion used to purchase the building.

The owner of the famous Hilton hotel in Union Square, also in San Francisco, has given up paying the loan of US$ 725 million and will return the property to the creditor. Owners blamed the slow return to work and vacant offices for the decision.

This could be the beginning of the housing crisis as far as commercial real estate is concerned. According to real estate data provider Trepp, earlier this month, about $270 billion in bank loans on these properties mature in 2023 — and there is a high risk of default.

Interior view of 555 California Street in San Francisco (Image: Vornado Realty Trust)

banking crisis

Experts say that if these commercial property owners depend on the people in the offices and they aren’t there, chances are they won’t be able to pay back their loans.

This means that amounts will accumulate and harm the banking system.

According to Mark Zandi, chief economist at Moody’s Analytics, this accumulation could lead to bank failures.

Solutions

However, experts say that this situation has been known for a long time and the worst can be avoided.

Banks can renegotiate loans, for example, as happened with 555 California Street; this is a banking strategy of diluting the consequences over several years.

According to Tracy Hadden Loh, a member of the Brookings Institution, which researches real estate and cities, the strategy is in the interest of both the real estate and banking systems, since neither sector wants to collapse.

With information from The Washington Post

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