Today we are taking a look into the office sector. Many believe that this is a space of commercial real estate that will not return to pre pandemic levels of valuation. The concern is caused by many different factors, but none bigger than the elevated vacancy and higher interest rates. The article suggests that office vacancy rates remain around 20% and do not look like they will return anytime soon.

Elevated vacancy rates, tighter financial conditions, and increased interest rates all cause a sharp decrease in office valuations. Cap rates are rising and NOI is falling (not a good combo). In many markets office properties are no longer worth the debt on the property. This especially becomes a problem when your loan is coming due. Property owners are asking for extensions or having to recapitalize by bringing in new money. If they can do neither, they will have to hand over the keys to the building and leave their equity and debt investors burned.

So what is the solution? Unfortunately, there is no one easy solution. Offices could always be repurposed to retail/multifamily. Properties could be demolished and sold to developers for a compete new start. Or the government could step in and offer some major incentives for the office sector. If you have any other ideas how the office space could be saved, feel free to comment below.

In our opinion, traditional office will never be the same. Jobs are continually moving outside the major cities and into the surrounding suburbs. We believe that office spaces will follow the outward expansion and set up smaller spaces as companies just do not need the amount of space they use to require.

Thank you,

The Nest Journal

Article of the day: apple.news/AcLag8dr7Sp6uu7pQG8ROWg

(I do not own the rights, and there is no infringement indended.)