'Empty Offices' Commercial Real Estate Value Evaporates by $800 Billion

The spread of remote work and the impact of high interest rates have combined to cause a sharp increase in office vacancy rates in major cities worldwide, resulting in an estimated building value impairment loss of $800 billion (approximately 1,020 trillion KRW), according to a recent study.

On the 13th (local time), global consulting firm McKinsey Global Institute diagnosed that due to changes in work styles following the COVID-19 pandemic and interest rate hikes, commercial real estate such as office buildings will face enormous valuation losses at least until 2030.

McKinsey reflected the trend of expanding remote and hybrid work environments (a mix of remote and office work) in nine major cities worldwide (New York, San Francisco, Houston, Paris, London, Munich, Tokyo, Beijing, Shanghai), assuming a 13% decrease in office demand by 2030.

The estimated valuation loss of $800 billion by McKinsey represents a 26% decrease compared to asset values in 2019. If variables such as changes in work styles and interest rate hikes are combined, the decline could increase to as much as 42%. McKinsey stated, "The proportion of workers commuting to the office daily has dropped to 37% compared to pre-pandemic levels," and added, "If changes in work styles are combined with rising interest rates, the scale of losses could become even larger."

According to real estate data analytics firm Green Street, the value of U.S. commercial real estate has fallen by 27% since March last year, when the Federal Reserve (Fed), the U.S. central bank, began raising interest rates.

[Image source=AP Yonhap News]

The recovery of the commercial real estate market is expected to be difficult for the time being. After the sharp decline in commercial real estate values following the 2008 global financial crisis, it took six years to recover. Richard Barkham, Global Head of Research at CBRE, a commercial real estate services company headquartered in Texas, said, "In this downturn, the recovery period could extend up to 10 years."

When building values decline, borrowers of real estate loans are more likely to fail in refinancing efforts such as extending maturities or switching to new loans. This could lead to loan defaults in the banking sector.

According to Bloomberg News, in preparation for the impact of the commercial real estate downturn and the resulting large-scale defaults, the six largest U.S. banks wrote off $5 billion (approximately 6.5225 trillion KRW) in bad loans in the second quarter. They have also set aside about $7.6 billion in loan loss reserves to prepare for additional defaults. The loan loss write-offs and reserves of these banks in the second quarter of this year have both doubled compared to the same period last year.

This content was produced with the assistance of AI translation services.