Lots Of US Office Bldgs Could Become Obsolete

USA – A real estate executive thinks that many office properties across the country could fall into disuse, reported Business Insider on Thursday afternoon (17 August, SGT).

RXR Realty’s Chief Executive Scott Rechler expects many office buildings in the US to become obsolete. As a result of this, banks and investors holding debt backed by these assets could suffer losses.

Nonetheless, Grade A office properties will continue to perform well as more employees return to in-person work. On the other hand, lower-grade assets like Grade B office buildings will likely become “competitively obsolete,” he noted.

Rechler shared that lower-tier office assets could be repriced and transformed into other forms of commercial properties like apartments. But such conversions are difficult to do and only a limited number of office buildings can be converted.

“If you really think about it, if you’re trying to attract your workforce back to the office and you want to collaborate, you want to be in places that have energy, that have amenities, places where people can gather together … Class B, dark buildings, bad infrastructure, bad light, bad air, people don’t want to be in those buildings,” he explained.

Based on statistics from National Association of Realtors, the overall office vacancy in the United States reached an all-time-high of 13.1 percent at the end of Q2 2023.

Moreover, The Wall Street Journal reported that financial institutions are already buying distressed office space and other commercial properties, with Goldman Sachs among the list of banks that are raising billions to buy up such assets.

Rechler expects more distressed office properties to enter the market, which could result in further price drops. He warned that “there are going to be losses at the bank level, there are going to be losses at the investor level.

For months, market watchers have warned about a looming crisis for the commercial property market as there’s around S$1.5 trillion worth of debt in the industry that will soon reach maturity. That could spell trouble for commercial property owners, including office landlords, who will need to refinance their loans, as lenders are limiting their exposure to the sector or unlikely to grant debt at low interest rates.

These issues could lead to a major commercial property market downturn, which could see the prices of office buildings falling sharply by 35 percent in the next several decades, a research company warned.