Commercial Real Estate Is in Trouble. Here’s What to Focus On.

February 9, 2024

The low occupancy rate is a ticking time bomb for owners of office buildings. When leases expire, tenants won’t want as much space as they have now. Vacancy rates will shoot up. We’re already seeing that happen. Last month Moody’s Analytics announced that the national office vacancy rate rose in the fourth quarter to 19.6 percent, breaking the record of 19.3 percent that was set in 1986 after a period of overbuilding and was then tied in 1991 during the savings and loan crisis.

The need for office space wouldn’t decline very much if everyone came in on the same days and people still needed their old desks. In reality, though, as the chart above shows, occupancy rates are fairly low even on the highest-occupancy days. Plus, some employers are using the days when people are together in the office for team activities that don’t require as much space, Ryan Luby, an associate partner at McKinsey & Company, told me. He coauthored a report for the McKinsey Global Institute last year titled “Empty Spaces and Hybrid Places.”

Hardest hit are owners of Class B buildings (older, not so nice) because their tenants are upgrading to newly vacant Class A space as their leases expire, Alex Horn, the founder of BridgeInvest, a private lender, told me. “The A will make more money than before,” Ilan Bracha, a New York City real estate broker, told me. “Forget about just surviving. But the B and C, there’s no room for them.”

See the full article on The New York Times

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