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The Mortgage Bankers Association estimates U.S. office building owners may have to repay or refinance $117 billion in loans over 2024…
U.S. Office building owners must repay or refinance loans totaling an estimated $117 billion throughout 2024. As owners, organizations, and investors attempt to understand the impact of this ticking time bomb, how does it relate to hybrid working and HR strategy…
Data from the Mortgage Bankers Association suggests U.S. office building owners must repay or refinance a staggering $117 billion in loans in 2024.
Office landlords took out the loans ten years ago when interest rates were twice as low. Today, mortgage rates are far higher, revenues from office buildings have been hit by the rise of remote work, and the fallout is already threatening banks, borrowers, property developers, and tenants alike.
Downturn | Remote work is dwindling, is office space the reason?
The commercial mortgage crisis loomed over the U.S. throughout 2023. In April, the collapse of Silicon Valley Bank triggered widespread uncertainty and fear of a recession to rival the 2008 financial crisis.
By the end of September, the volume of past-due commercial real estate loans hit their highest level in ten years.
On 29 November 2023, Austrian real estate company Signa Holdings filed for insolvency, with its parent company, Signa Group, owing up to an estimated $14 billion. An Austrian court has since mandated Signa Holdings must sell its 50 percent stake in the legendary Chrysler Building.
The U.S. Cities of Manhattan, NY (~$10 billion), San Francisco, CA (~$4 billion), and Los Angeles, CA (~$2 billion) hold the highest amount of commercial mortgage debt.
Flexible working’s impact on commercial real estate
The rise of flexible working since 2020 has also played a major role in reshaping the commercial real estate market, alongside other factors including rising interest rates.
According to data from Kastle Systems, as of 13 December 2023, each of these cities – New York (51.3%), San Francisco (46.7%), and Chicago (55.9%) – all have an average occupancy rate around half of pre-pandemic levels.
Many organizations are either not renewing leases on office property or opting to downsize their office space, particularly within metropolitan areas.
A 2023 McKinsey report indicates that office attendance rates – reduced by around 30% compared to pre-pandemic levels, and particularly concentrated in larger, knowledge-working companies – have been relatively steady since 2022.
And yet, the return-to-office movement grows in momentum. A 2023 report from Resume Builder found that 90% of 1,000 company leaders say their company plans to implement return-to-office policies by the end of 2024.
Goldman Sachs, for example, has consistently pushed for all workers to be in the office five days a week. Google and Meta are two other major employers to become more stringent with their expectations for in-office work.
High levels of vacancies offer greater choice for organizations considering renewing or refinancing their lease.
What it means for HR
The commercial real estate crisis could also threaten the return-to-office push. Mounting debts and the exit of major competitors may push landlords to increase prices. Uncertainty may also deter organizations from agreeing to costly, long-term tenancies.
Moreover, the rise of remote work causes ripple effects within cities that experience less footfall.
Organizations and HR leaders that rent office space may also need to brace themselves for change and uncertainty. The scale of the commercial real estate crisis is widespread, and cases such as Signa Holdings indicate that even high-profile offices are at risk.
Commercial real estate providers may also seek to redesign office spaces to better suit hybrid working models.
As employees cope with accelerated change and uncertainty, clear communication and transparency from HR and the organization around expectations for in-office work – and any planned changes to office working - continue to be paramount.
