Misunderstanding The CRE Office Market
The CRE Office Market Will Not Resolve Itself Overnight
“If offices are in such hot water, where are all the forced sellers?” – that’s the WSJ’s opening line in today’s leading real estate article. What the WSJ misses with that opening line is that the CRE Office market is not a one-size-fits-all market. Rather, it is an idiosyncratic market, a property-specific market. What matters are the physical characteristics of the property in question, the financial health of the property owner and the financial health of the bank. Banks don’t want to have to take control of CRE properties. Yet, we have seen that some CRE Office owners are willing to walk away from loans on distressed properties.
The CRE Office market will take years to get sorted. The fact is that prospective tenants do not want to lease older office buildings. The fact is that vacancies are likely to remain elevated given the hybrid work from home, limited time in the office situation. Therefore, U.S. cities will have older Office buildings that are largely vacant for years to come.
Perhaps as interest rates move back down to 1% or so (the Fed is ultimately going there despite Powell’s tough guy act), those older properties will be replaced. Depending upon the city, I can imagine a scenario where municipalities will issue bonds to share the replacement cost with CRE owners in an effort to make properties and therefore the city in question more attractive to prospective tenants relative to other cities.