While the pandemic feels like a lifetime ago, some of its most profound after-effects are only now starting to be felt and understood.
Along with disrupting certain long-formed corporate habits, stay-at-home orders and the move to online work for many industries have also permanently transformed what many of the country's business districts look like.
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On June 6, market commentator site The Kobeissi Letter posted statistics showing that 17% of all office space in the U.S. is currently sitting vacant. At 31%, that number is highest in San Francisco and near a quarter in cities like Los Angeles and Chicago.
More Than 30% Of Office Space In This City Is Sitting Empty
Denver, Cleveland and Phoenix are the other major urban areas where the number of empty offices has surpassed 20%. All tying for 19%, Philadelphia, Boston, Houston and Austin were close behind and also landed in the top ten of cities.
While Wall Street and the finance industry the city is known for have been stricter about mandating a return to office, 17% of New York City's offices are still sitting unused in 2023.
Although the pandemic has pushed many industries to reconsider who needs to come in and what work can be done online in a way that may be better long-term, a pressing problem with so much empty office space is the drop in corporate real estate value and the financial crisis that can ensue if multiple companies cannot afford to pay long-standing leases at the same time.
"Meanwhile, over $1.5 trillion of commercial real estate debt is coming due by 2025," Adam Kobeissi, who is behind the Kobeissi Letter newsletter, wrote in the Twitter post. "Most of this debt is held by regional banks and vacant properties are struggling to pay the debt. This is a crisis in the making."
Recent property developers like RXR and Brookfield Asset Management have recently defaulted on their million-dollar office portfolio as they struggle to find people to lease both corporate work space and retail locations.
We Could See Landlords Using Some Influence
"With a third of all office leases expiring by 2026, we can expect higher vacancies, significantly lower rents, or both," Dror Poleg writes in an extensive piece for The Atlantic. "[...] Landlords very well lease all empty retail stores to Louis Vuitton and Apple. There's simply not enough demand for such space, and new features make buildings even more expensive to build and operate."
This, in turn, could cause a default crisis in which property developers and other corporate borrowers are unable to pay their debts while banks are unable to stay operational. In the piece, Poleg points toward the recent collapse of Silicon Valley Bank and Signature as a precursor for what can happen to a number of others for real estate-related reason.
While Poleg calls some developers' choice to default now "partly a game of chicken," too many doing it will cause a massive hit to the U.S. economy.
"Most commercial loans were issued before the pandemic, when offices were full and interest rates were low," Poleg wrote. "The current landscape is drastically different: high vacancy rates, doubled interest rates, and nearly $1.5 trillion in loans due for repayment by 2025. By defaulting now, landlords leverage their remaining influence to advocate for loan extensions or a bailout."
