Office Buildings Are At “The Beginning Of A Crisis”

Key Takeaways:

– Commercial real estate holdings are becoming obsolete as remote work becomes more common.
– Office landlords are facing an uncertain future and a present where office buildings sit half-empty.
– The price of office buildings has dropped as much as 40% since the start of the pandemic.
– Some investors are taking advantage of the low prices to purchase office buildings for other uses.
– The reduction in the value of office buildings will lead to more regional banks extending bad loans.
– This could have implications for the tax base of cities that rely on commercial property taxes.
– The crisis presents an opportunity to reimagine and redesign office spaces for other uses.
– The idea of working where one lives is a transformational concept that society is just beginning to realize.

inman:

Landlords are confronting the fact that their commercial real estate holdings are becoming increasingly obsolete.

With the entrenchment of remote work, office landlords are facing an uncertain future and a scary present.

Commercial real estate owners are confronting the fact that their buildings are becoming increasingly obsolete as corporate tenants shrink their footprint and office buildings sit half-empty in the nation’s biggest city, according to a report from 60 Minutes

“This post-COVID world of higher interest rates, the changing nature of how people work and live, we’re not going back to where we were. It’s a different world. And it will be turbulent,” Scott Rechler, CEO of the New York City-based commercial real estate firm RXR, told interviewer Jon Wertheim.

60 Minutes spoke to Rechler inside 61 Broadway, a building near Wall Street owned by RXR where every other floor currently sits vacant. Rechler said he has defaulted to his bank on a $240 million loan taken out towards 61 Broadway.

“We invest a lot of equity. If it works, we make a lot of money. If it doesn’t work, the lender can take over the building,” Rechler said. “You gotta face reality, right? Reality’s coming your way.”

Similar scenarios are playing out in office buildings in cities across the United States, resulting in the price of office buildings tanking as much as 40 percent since the start of the pandemic.

This has allowed some investors, such as Tony Park and Elad Dror, to take advantage of once-in-a-lifetime deals. The business partners told 60 Minutes that they were able to purchase an empty office building near Penn Station after eyeing it for years — for less than half what they once offered for it. They plan on converting the building to “anything that is not an office.”

Columbia Business School Professor Stijn Van Nieuwerburgh believes this is just the beginning of the office apocalypse since many office tenants have yet to make a decision about what to do with their leased space.

“I think we’re at the beginning,” Van Nieuwerburgh said. “There is a potential crisis here.”

A reduction in the value of office buildings will, over time, lead to more regional banks entering into extensions on their bad loans, a strategy that works well when interest rates are low but that becomes more complicated when rates are as high as they are now. This could have dire implications, not only for the banks and their clients but for entire cities as well, which derive much of their tax base from commercial property taxes.

“In the long run, property taxes on those buildings will also fall by 40 percent, and these commercial property tax revenues are an important component of the budget of local governments,” Van Nieuwerburgh said. “And some people are gonna decide that, you know, the quality of life has deteriorated too much and they want out.”

That process has already begun to play out, Van Nieuwerburgh told 60 Minutes. In the past three years, the biggest cities in the United States have lost about 2 million residents, taking with them their tax dollars.

Van Nieuwerburgh believes leaders should look to the brewing crisis as an opportunity to reimagine spaces that take up an enormous chunk of our urban centers.

“It’s no longer fit for purpose. We’ve got to redesign it. More space for communities, more space for artists. Maybe pickleball courts or basketball courts. There’s lots of different uses for these buildings, especially when you can buy them at a depressed price,” he said in the interview.

“For all of human history, humankind has been tied to work where it lives. We were farming the farms and we lived on our farms. We were working in the factories and living close to the factories. We no longer have to live where we work. And that’s a very transformational idea. And I believe society is only at the beginning of realizing the full potential of that idea.”

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Property Chomp's Take:

In today's ever-changing business landscape, landlords are facing a harsh reality: their commercial real estate holdings are becoming increasingly obsolete. The entrenchment of remote work has caused office buildings to sit half-empty, leaving landlords uncertain about the future and struggling in the present.

According to a report from 60 Minutes, corporate tenants are shrinking their footprint, leaving office buildings vacant in major cities like New York. Scott Rechler, CEO of the New York City-based commercial real estate firm RXR, stated that the post-COVID world has brought about higher interest rates and a changing work and living environment. He believes that the old way of doing business is over and that turbulence lies ahead.

One example highlighted by 60 Minutes is 61 Broadway, a building near Wall Street owned by RXR. Every other floor of the building currently sits vacant, and Rechler has defaulted on a $240 million loan taken out towards the property. This scenario is not unique, as office buildings across the United States are experiencing a decline in value, with prices dropping as much as 40% since the start of the pandemic.

However, this decline in value has presented opportunities for some investors. Tony Park and Elad Dror, business partners interviewed by 60 Minutes, were able to purchase an empty office building near Penn Station for less than half of their previous offer. They plan on converting the building to something other than an office space.

This trend of office buildings losing value is expected to continue as many office tenants have yet to make a decision about what to do with their leased space. Columbia Business School Professor Stijn Van Nieuwerburgh believes that this is just the beginning of an office apocalypse, with potentially dire implications for banks, clients, and entire cities. As the value of office buildings decreases, regional banks may struggle with bad loans, especially when interest rates are high. Additionally, cities rely heavily on commercial property taxes, which will also fall by 40% as a result.

Van Nieuwerburgh suggests that leaders should view this crisis as an opportunity to reimagine these spaces. He believes that office buildings are no longer fit for their original purpose and should be redesigned to serve different functions. This could include creating more space for communities, artists, or recreational activities like pickleball or basketball courts. With depressed prices, there is potential to transform these buildings into valuable assets for the future.

Ultimately, the decline of office buildings and the changing nature of work and living arrangements present both challenges and opportunities. It is crucial for landlords and city leaders to adapt and find innovative solutions to ensure a successful future in the evolving business landscape.

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