The office sector has apparently become an official horror show to the degree that plenty of people have written it off as irredeemable. A Bloomberg MLIV Pulse survey saw two-thirds of 919 respondents saying the U.S. office market “will only rebound after a severe collapse.” A larger percentage said that U.S. commercial real estate prices wouldn’t seen bottom until the second of half of 2024 at the soonest.
There is nothing new that office on the surface faces significant challenges that GlobeSt.com has repeatedly reported for a year or more. CRE data firms have run analyses on a regular basis, looking at outstanding CMBS loan values, estimates of general property valuation reductions, tallies of delinquencies, and so forth.
But something that became clear since last fall when GlobeSt.com asked CRE experts what 2023 would be like, and a current round of research into expectations of the market, uncertainty truly rules the industry. No one expected a bank crash, ongoing interest rate increases, extended hybrid work, and so much more.
Trying to decipher this future will be just as difficult. Here are a number of considerations in trying to decide whether disaster is so clear:
• Although Bloomberg likely provided demographic details on the surveyed group for its terminal customers, they weren’t in the article. That makes it impossible to determine whether the people were best placed to estimate • Banks, particular regional and smaller ones, have faced financial stress while holding a significant portion of CRE loans, including office. The FDIC shut down earlier this year, but while the names were high profile, losing a few banks in a year is common. • The banks holding loans might look at selling them, but eventually, things come to a point where most banks will have a remaining portfolio of loans. They will likely work out the loan, if possible, because the option is to take properties back, and most banks aren’t interested in doing so because managing and selling properties is not their preferred business. • Yes, it would take time for the loans to work their way out. The buildings don’t disappear from the face of the planet, so there is value and utility left in many. • Hybrid work and work from home are tricky. Even if workers don’t come back for full weeks, many will come in, probably in the middle of the week. The employer needs to embrace surge planning. They will need to keep a significant amount of space to fit everyone at those times. And corporate profits have gone up even with unused space during a challenging period. While companies might want to recapture as much of that money as possible, they typically don’t need to for profitability. • Predictions, even of personal choices given a specified scenario, are some of the least dependable types of market survey questions.
Given previous accuracy in predictions of the CRE market, perhaps some prudence, scenario planning, and calm are the best actions to take.