Financial Challenges Sparked by Persistent Remote Work Spreads Beyond Real Estate Sector
Although several news headlines announce banks calling the loudest for getting workers back to the office, the result of increasing office space vacancy and likelihood of lowering office building values has prompted banks to increasingly move to the sidelines when it comes to office lending and commercial real estate (CRE) exposure. Higher interest rates have further accelerated the developing trend since office loans make up a substantial part of banks’ loan or investment portfolios. The level of distressed commercial real estate has risen for five consecutive quarters, reaching nearly $80 billion at the end of September according to CRE and infrastructure data provider MSCI Real Assets. Stagnant and falling cash flows at office properties has sharply increased net charge-offs for bank-held CRE loans in the 2nd quarter of 2023. The Q2 2023 report released by Trepp, a data provider to the structured finance, commercial real estate, and banking markets indicated that the “net charge-off amount for the office sector more-than-tripled consecutively in the previous two quarters,” increasing from $49 million in Q4 2022 to $149 million in Q1 2023, and to $459 million in Q2 2023.