American Bankruptcy Institute February 2024 Analysis: The Brutal Reality of Plunging Office Values Is Here
The shakeout in the $20 trillion U.S. commercial real estate market has long been delayed for a simple reason: No one could figure out just how much properties were worth. More crucially, few wanted to, according to a Bloomberg News analysis. Since the COVID-19 pandemic upended the use of real estate around the world, lenders have had little incentive to get tough on borrowers squeezed by soaring interest rates and take on loans that have lost value. Transactions ground to a halt as potential sellers were unwilling to unload buildings at distressed prices — an outcome that allowed them to pretend that nothing had fundamentally changed. Across the country, deals are starting to pick up, revealing just how far real estate prices have fallen. That’s spurring widespread concern about losses that could ripple across the global financial system — as underscored by the recent turmoil unleashed by New York Community Bancorp, Japan’s Aozora Bank and Germany’s Deutsche Pfandbriefbank as they took steps to brace for bad loans. In Manhattan, brokers have started to market debt backed by a Blackstone-owned office building at a roughly 50 percent discount. A prime office tower in Los Angeles sold in December for about 45 percent less than its purchase price a decade ago. Around the same time, the Federal Deposit Insurance Corp. took a 40 percent discount on about $15 billion in loans it sold backed by New York City apartment buildings. It’s a turning point for the market as the Federal Reserve ends the fastest pace of interest-rate hikes in a generation — providing more clarity to real estate investors on where borrowing costs stand. Some property owners will have little choice but to sell as their debt comes due; more than $1 trillion in commercial real estate loans is set to mature by the end of next year, according to data firm Trepp.