Covid upended the office market

... and the risk of wider problems remains

When Jerome Powell, the chair of the Federal Reserve, appeared on “60 Minutes” this past weekend, he said he wasn’t super-worried about the risk of a banking crisis triggered by defaults on office buildings and downtown retail. 

While acknowledging that the future is uncertain, he said that “it appears to be a manageable problem” for the biggest banks. 

He said “we’re working” with some smaller and regional banks that have “concentrated exposures in these areas that are challenged.”

 People who discovered the benefits of working from home during the Covid pandemic aren’t continuing to come back. The rebound in working from the office has pretty much stalled,

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.

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,

“The office market has an existential crisis right now,” Barry Sternlicht

 “It’s a $3 trillion asset class that is probably worth $1.8 trillion. There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.”

Peter Coy New York Times 7 February 2024

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