Stress Continues to Build in the Office Market as High-Levels of Vacancy Persists

Remote work has changed the office market leaving landlords facing persistently vacant office towers that has resulted in suspended or cut dividend payouts, while dealing with rising borrowing costs due to higher interest rates, worries about a possible recession, and “the understanding that office space won’t be used in the same way as in the past.” According to a recently released report by Moody’s, even without a recession, with more than $700 billion in outstanding debt, plus national vacancy rates that are 500 basis points, or 5% higher than pre-COVID times that “are set to rise,” and office revenues about 10% below “where they should be,” “real estate funds managed by the city’s leading private equity firms are seen as increasingly at risk.” The deterioration of these fundamentals led the credit-rating firm to downgrade three commercial real estate investment funds managed by Blackstone Group, Apollo Global Management and KKR. It has been further pointed out by the head of real estate economics at investment firm MSCI that “the supply of commercial properties experiencing some kind of financial hardship has doubled in the first quarter.”