Office buildings remain empty in cities across the United States as many workers continue to work from home more than three years after the coronavirus pandemic began. A large number of workers may never return to the office full-time, raising questions about the future of some buildings — and raising the prospect of a financial meltdown.
“I see a tsunami of loans coming due,” said Christopher Rising, co-founder and CEO of Rising Realty Partners, a Los-Angeles based commercial real estate company.
Rising Realty Partners spent $35 million to remodel a historic Los Angeles building into an impressive office space that remains nearly empty. The building, which is 300,000 square feet, has only leased two floors out of 11, according to Rising.
The same situation is seen in other cities like New York and San Francisco, where less than half of the office spaces are occupied, according to Kastle Systems, a property management company in New York. Rising Realty Partners estimates that New York City’s vacant office space alone could fill more than 26 Empire State Buildings.
Many buildings are financed with short-term bank loans. Morgan Stanley estimates that approximately $1.5 trillion will be due by the end of 2025, potentially leading to a wave of loan defaults.
“I think you’re going to start seeing a lot of defaults on office buildings,” said Patrick Carroll, CEO of Carroll, a real estate investment firm. Carroll manages a real estate portfolio worth over $7 billion.
“It’s really the perfect storm,” he said. “You know, these buildings are worth less than they were when they were originally financed, and interest rates being up, valuations down, they’re not going to be able to refinance these buildings.”
Nationwide, efforts to bring employees back to the office are facing resistance. According to a recent Pew survey, about one-third of workers in the U.S. who can work from home now do so all the time.
Carroll believes the current situation could cause more banks to fail, leading to a potential financial crisis.
“You could see a run on all small regional banks,” he said. “And that could put us back to where we were with the financial crisis of ’08.”
Some companies, however, including Apple, Starbucks, Amazon and Credit Karma, require employees to come in three days a week.
To encourage collaboration, Credit Karma has a game room, music studio and yoga studio for employees.
“We think there is more energy, there’s more creativity. People work better together,” said Credit Karma’s CEO Kenneth Lin. “We actually want interaction.”