Real-estate investors see a hellish-perfect-dumpster-fire-storm
to describe the outlook for commercial property and you will get a colourful response. “Office is a dumpster fire,” says Daniel McNamara of Polpo, an investment fund. His view of the wider market, which includes shops and warehouses, is only a little less grim: “It really is the perfect storm.” Tom Capasse of Waterfall Asset Management, a debt-investment firm, has nicknamed places where the tech bubble has burst, including San Francisco and Seattle, “office hell.
The situation poses a problem for two big, intertwined American industries. The first is property, where owners are grappling with the idea that the office buildings they own—uncomfortably empty and unlikely to fill up again—might only be worth half what they paid for them. The second is their financiers.
Vacancy rates have risen in all but the best offices. Landlords are offering generous incentives to lure skittish tenants. In San Francisco more than 29% of offices are empty, nearly eight times the pre-pandemic level. Asking rents in the city, which has seen the biggest jump in vacancies across America, are down by 15% compared with 2019. As these buildings can have high costs to run, in part owing to property taxes, even a small dip in rents or occupancy can turn a building into a lossmaker.
At the end of 2022, the commercial-property industry owed $5.6trn in debt to investors and financial institutions. According to Trepp, a data provider, half of this was to banks. Brookfield and funds of its size might need to repay big institutions, but the vast majority are on the hook to outfits with less than $250bn in assets—ones which are already under severe stress after the collapse of Silicon Valley Bank.
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