Interest Rates, Layoffs And Workers Choosing Home Are Causing Office Building Values To Plummet

Chances are there’s a lot of empty office space at Twitter Inc. now that new owner Elon Musk fired much of his inherited staff or demanded so much of them that they left en masse.

But vacant space at Twitter is merely a reflection of the U.S. office market as a whole.

In San Francisco, for example, there is a record high 27.1 million square feet of office space available, according to commercial real estate firm CBRE. The New York Times has reported that New York, Boston, Atlanta and other cities are also suffering with vacancies higher than prepandemic levels as companies move to smaller offices. That leaves landlords and commercial real estate (CRE) investors with millions of square feet of vacant space.

According to the Times, Wall Street investors believe the office space sector is in for a deep slump, with shares of large properties trading close to or below their pandemic lows. Some bonds backed by office loans are also showing signs of stress.

Not unsurprisingly, values are plummeting. According to another study from business professors at Columbia and New York universities, the value of office buildings in the U.S. could see a drop of 39% ($454 billion) in the next few years.

“We see lots of tenants not renewing their leases, going either fully remote or renewing their leases but signing up for less space,” said Stijn Van Nieuwerburgh, one of the authors of the paper and a professor specializing in real estate at Columbia Business School. “It all adds up.”

The Times also pointed to tech layoffs like those at Twitter as fueling the most significant contribution to empty offices. According to Layoffs.fyi, a job cut tracking site, more than 100,000 technology workers have lost their jobs this year. And while more office workers are back at work than a year ago, higher interest rates are also negatively affecting industry inventory. Many landlords have stopped acquiring properties or providing maintenance and upgrades to the ones they already own. Others are converting office space into residences.

A recent survey from global accounting firm Ernst & Young found that 58% of executives polled say they plan to invest in CRE despite the current economic environment, while two-thirds say they are either leasing or plan to lease suburban office space. Only 33% claimed to be looking at downsizing their CRE investment.

“The economic downturn will force leaders to make important decisions regarding their real estate portfolios — from investments to space optimization, to workforce models,” Mark Grinis, EY Americas Real Estate, Hospitality & Construction Leader, said. “Employers are beginning to understand that they need to earn the commute time of their employees, and many are investing in the office of the future to achieve this.”

That thought was backed by workspace design company Unispace, which recently released a survey showing workers are looking at office locations like their health clubs. A common belief is that the closer a health club is to your home, the more willing you will be to work out regularly. The Unispace survey found this also was the case for employees deciding whether to return to the office, with 79% of them claiming they’d be happy to go back — if it was just five to 10 minutes from home.

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