– US office values may match or exceed the 2008 real estate fallout, with prices expected to continue to drop
– Remote work trends and higher interest rates are likely to prolong the recovery of office property values
– Delinquency rates on commercial mortgage-backed securities backed by office properties are expected to increase, with loan extensions potentially delaying an eventual crash in the commercial real estate sector.
The US office market is experiencing a significant decline in property values that may surpass the real estate fallout seen in 2008. Fitch Ratings reported that office values have already dropped by an estimated 35% this cycle, suggesting that the descent is far from over. Unlike the recovery seen after the 2008 crash, current property values are near a four-year low and are not expected to bounce back quickly. Remote work trends, challenging refinancing conditions, and higher interest rates are all contributing to the prolonged decline in office property values.
Goldman Sachs estimates that a large percentage of US workers will continue to work from home, leading to a decreased demand for office space. This shift, along with other factors, could permanently lower property valuations and increase losses on commercial mortgage-backed securities. Fitch Ratings predicts that the CMBS delinquency rate will exceed the post-2008 financial crisis peak, reaching 9.9% by 2025. The distress in the office sector is part of a broader decline in commercial real estate as prices face their steepest drop in decades, according to the IMF.
Borrowing costs are rising, making it challenging for property owners to secure financing. Many are negotiating loan extensions, but this could only delay a potential crash. Analysts warn that a significant amount of commercial real estate debt is set to mature in 2027, which could lead to further instability in the market. Delinquent loans are already increasing in collateralized loan obligations, indicating a growing level of distress in the commercial real estate sector.