There is approximately $1.5 trillion in commercial real estate debt which is owed to pension funds, insurance companies or banks before the end of 2025. That commercial real estate market is not just the office space in the Wall Street district or in Chicago or San Francisco; it also represents a national portfolio of real estate that includes retail, industrial, multi-family properties and office space not included within the borders of cities.
Still, commercial real estate is in a quagmire of questions, most of which don’t have any clear single answers. The return-to-office movement by companies is not dragging everyone back to the leased office space they had originally occupied. According to Colliers, almost all the biggest office buildings in downtown Los Angeles are currently worth significantly less than when they were purchased. Los Angeles’ office towers have more than $230 of debt per square foot. The only building that was sold in downtown LA was sold for $154 per square foot. In addition, one of the biggest commercial landlords in LA, Brookfield, has defaulted on more than a billion dollars worth of loans this year. That is not just problematic; that is almost catastrophic.
But there are other ramifications attached to the commercial real estate market that have not been even considered: first, city property taxes will inevitably fall off the proverbial cliff if these office buildings do not return to their pre-pandemic occupancy levels. Second, such abandoned office buildings will have a domino effect upon the retail businesses, restaurants and other small businesses that once operated in those commercial districts. Another consideration is that some of the commercial real estate loans might have been backed by small regional banks, creating a very tight credit market and potentially bank runs should a financial meltdown come about. But experts do not believe that such a scenario is likely to take place.
One reason that this catastrophic Armageddon may not occur is that there is a perception that commercial office space only exists the urban centers. This is not true. The majority of commercial office space is found in Suburban regions, which is composed of medical offices, malls and various warehouses and multi-family dwellings. The lenders of such properties will not feel the strain and pressure that those commercial properties in urban settings will feel.
One of the factors that’s pretty significant is that during the Great Recession, the residential market represented was worth $43 trillion. Today’s commercial market is valued at only $21 trillion, most of which consists of $7 billion in office space. So the concern regarding the catastrophic turn of events may not really be as serious as one might believe it to be if one were reading just the Wall Street Journal. The other factor is that many banks, rather than foreclose on a property, may be willing to extend the loan terms in hopes that the investors will be able to recoup and recover their business to the pre-pandemic level.