Nearly everyone can agree that a lasting benefit of the pandemic experience was how it demonstrated that increased workplace flexibility regarding remote work does not automatically hurt productivity. But what impact will this make on the commercial real estate market?
CoreNet Global’s research, as well as many other sources of information, point to some type of mix of in office and remote work being the way forward, but that sweet spot remains unique to each company considering it.
Most companies say that office space is still vital for collaboration at least some portion of the week, while many companies are looking at smaller corporate floor plates in the coming years. And that is leading to concerns of a chain reaction economic affect.
“Just as lenders to the sector grapple with turmoil triggered by rapidly rising interest rates, the value of buildings such as offices is crashing. That could add to pain for banks and raises concerns about damaging ripple effects,” according to a recent article on CNN.com.
“Although this is not yet a systemic problem for the banking sector, there are legitimate concerns about contagion,” said Eswar Prasad, an economics professor at Cornell University, in the article.
“In the worst-case scenario, anxiety about bank lending to commercial real estate could spiral, prompting customers to yank their deposits. A bank run is what toppled Silicon Valley Bank last month, roiling financial markets and raising fears of a recession in the United States.”
“That is not the central expectation right now,” the article said. “Since the 2008 financial crisis, banks have tightened lending standards and diversified their clientele. Loans for offices account for less than 5% of US banks’total, according to UBS. And Christian Ulbrich, (chief executive of global commercial real estate services giant Jones Lang LaSalle (JLL), said that “while the speed at which borrowing costs have risen has put significant pressure on the commercial real estate industry, it has lived with rates at this level for “’most of its history.’”
Mark McDonald, VP of Customer Success, CoStar Real Estate Manager told CoreNet Global that “we are keeping up with the ever-changing needs of our customers, who are largely tenant occupiers of commercial real estate. The industry has woes in certain asset classes as companies grapple with policies around return to office and its impacts on innovation and employee engagement. The clock pendulum swung far to the work-from-home side during and after the pandemic, though we are seeing companies beginning to pull workers back to the office in at least a hybrid capacity. The office sector is reeling as loans tied to assets in most major markets are coming due over the next few years. Most likely, there will be an increase in distressed assets, though listening to the executive teams of our financial service customers, they are not forecasting a full-blown financial crisis tied to underperforming loans.”