Unwanted space: World's empty office buildings have become a debt time bomb

In New York and London, owners of gleaming office towers are walking away from their debt rather than pouring good money after bad. The landlords of downtown San Francisco’s largest mall have abandoned it. A new Hong Kong skyscraper is only a quarter leased.
 

The creeping rot inside commercial real estate is like a dark seam running through the global economy. Even as stock markets rally and investors are hopeful that the fastest interest-rate increases in a generation will ebb, the trouble in property is set to play out for years.
 

After a long buying binge fueled by cheap debt, owners and lenders are grappling with changes in how and where people work, shop, and live in the wake of the pandemic. At the same time, higher interest rates are making it more expensive to buy or refinance buildings. 
 

 

A tipping point is coming: In the US alone, about $1.4 trillion of commercial real estate loans are due this year and next, according to the Mortgage Bankers Association. When the deadline arrives, owners facing large principal payments may prefer to default instead of borrowing again to pay the bill.
 

Major institutional owners including Blackstone, Brookfield and, Pimco have already chosen to stop payments on some buildings because they have better uses for their cash and resources. 
 

The number of transactions is plunging—and when deals do happen, the price declines are stark. 
 

In the US values for institutional-quality offices are down 27 per cent since March 2022, when interest rates started going up, according to data analytics company Green Street. Apartment building prices have declined 21 per cent, and malls are off 18 per cent. Office prices are expected to fall over 25 per cent in Europe and almost 13 per cent in the Asia-Pacific region before hitting a trough, PGIM Real Estate, a unit of Prudential Financial, forecasts.
 

Commercial real estate’s woes will add to the stress on a financial system that’s already reeling from this year’s crisis in regional banks. And as the downturn deepens, it stands to have a transformational impact on some cities as they contend with empty buildings and lower property tax revenue.