Perfect storm
Last week, the Wall Street Journal reported that an office building for sale in San Francisco — which was worth $300m before the pandemic — is now expected to receive bids around $60m, which would crystallize an ~80% loss for the seller. Though it’s an extreme example, the San Francisco fire sale is indicative of a broader issue, as many, including the famous 99-year-old investor Charlie Munger, are warning about an impending storm in the US commercial property market.
Given the rise of remote working, it’s no surprise that office planners are finding they have too much space — the US office vacancy rate reached an all-time high of 12.9% last month, marking its sixth consecutive quarter of increase. Big tech companies such as Meta, Lyft, and Salesforce have already begun shedding millions of square feet of office space.
If history is anything to go by, the pain in commercial real estate might only be getting started. The two most recent commercial real estate crashes saw values fall ~17% (1989-1993) and ~35% (2007-2010). That would suggest that prices could come down a lot further than the 8% they've already fallen — a comparison which gets more alarming when you consider that those crashes came before the remote work revolution.
As the largest lenders to, and owners of, commercial buildings, America’s banks are heavily exposed to any slowdown. Indeed, banks hold roughly half of the whopping $5.6 trillion in debt that the commercial property industry owed in 2022.
