The Growing Commercial Real Estate Threat Facing Our Economy


The conference was dominated by the fact that landlords (other than owners of tier 1 properties) are unable to get any financing, except at exorbitant rates around 15% which is more than double the current financing in place for these buildings. It was a hot topic at the conference that landlords, other than those who own tier one properties, were unable to obtain any kind of financing. The only way they could get financing at all was at rates of 15% or higher. This is double what the existing financing for these buildings currently costs. Major banks and technology companies have mandated that employees return to work for at least three days. The attendance rate for summer in New York and the United States is still below 50%. We are waiting to see the post-Labor Day attendance figures. If current trends continue defaults will increase, and the treacherous triangle of (1) banks with increasing default rates on office loans, (2) building owners with failing properties and (3) cities with declining tax revenues will put the entire system at risk as well as the potential for a soft landing which is hopefully within reach.

Accordingly, when Jamie Dimon demands that J.P. Morgan Chase employees return to work because he believes that is important for productivity, he is also acting out of a legitimate self-interest. It is important to keep an eye on this situation, as employers have received a lot pushback. We have in the past expressed our optimism that after Labor Day, more employees would return to work, but this will be seen. I’ve noticed that midtown Manhattan is a lot busier, while downtown is still struggling. In addition to free lunches, I think that employers and employees should be offered short-term tax incentives, as well as reduced and free transit fares, to encourage employees to return to work. In a recent paper, Nicholas Bloom, Stanford’s leading researcher on work-from-home, and two other academics concluded that remote work was associated with a 10% lower level of productivity than in person work. Further, the paper highlighted challenges with communicating remotely, barriers to mentoring, building, culture and issues with self-motivation as factors in their calculus.

This sort of revisionist analysis logically makes me very skeptical of these statistics which initially claimed that work from home lead to higher productivity. Michael Hobbs, a brilliant friend of mine from Intelligent Prospects Ltd. asks: Who is contributing and maintaining these statistics? What is their bias. Everyone with common sense understands that having people away from the office is not efficient. At the same time, if companies reduce the amount of office space they take up real estate costs are reduced. It is important to balance this. It depends who is goingred. The management is tired of chasing employees down who are not available. Understandably, most employees want the flexibility that remote work offers. This has been measured by WFH Research in surveys for several months and has remained at 28%. Trepp CMBS Research reports that the office special servicing rate rose 39 points in August 2023 to 7.72%. That is 456 basis points higher than the special servicing rate for office in August 2022, which indicates the creeping danger as loans expire, and buildings need to refinance.

This metric effectively conveys the fact that as each month passes, the stakes in this vital saga of urban life increase incrementally. The conversion of a few office buildings to residential uses is welcome but will not solve this systemic issue. The health of our cities, and the banking system, depends on this.