Empty office buildings may meet the same fate as zombie shopping malls

It’s been about four years since the Covid-19 pandemic first upended society. Cities and towns have mostly sprung back to life, but one aspect of daily life is unmistakable: The once-ubiquitous reality of working in an office for eight hours a day, five days a week is dead.

As many companies embrace remote and hybrid work, demand for office space has weakened and property values have fallen.

The predicament for office buildings is strikingly similar to that of regional shopping malls around the turn of the century, when Americans first began to gravitate en masse to online shopping, according to an analysis from the Treasury Department’s Office of Financial Research.

Many malls have shuttered since as retailers dialed back their brick-and-mortar operations.

But some zombie malls have been given new life, repurposed for other uses, in some instances after sitting vacant and abandoned for years.

“The redeveloped uses for regional malls include new retail space with a smaller footprint, mixed use, and warehouse/distribution space,” Treasury’s analysis said. “More eclectic options include use as a cricket stadium, a police precinct, and an indoor cannabis farm.”

Could struggling office buildings also eventually be converted into housing, stadiums or indoor farms?

It’s quite possible. The deciding factor is whether the commercial property market sees occupancy rates in office buildings ever returning to pre-pandemic levels.

“It’s a focus of how much office space you need if people are going to work remotely and that’s going to linger for a little while,” John Toohig, head of whole loan trading at Raymond James, told CNN.

“And if you drill a little deeper, the office loans that are expressing distress are for buildings in urban city centers,” he said.

That means empty office buildings in cities such as San Francisco and Washington, DC have a better shot at eventually becoming repurposed because of how much trouble they’re in, including declining real estate values.

A report from McKinsey Global Institute said that remote work risks wiping $800 billion from the value of office buildings in major cities worldwide by 2030.

Much also depends on the viability of repurposing a failed office building, Toohig said, which usually involves a study being done to determine whether the costs of repurposing a commercial building would be worth it in the long-run.

To convert a commercial building into housing units, for example, a study would have to consider if there’s enough demand for housing in the area (other studies would consider different variables.)

The outlook for office buildings in 2024 isn’t very rosy.

CBRE, a commercial real estate services firm, said in estimates released Thursday that US office vacancy will likely increase further next year, reaching a 19.8% vacancy rate, up from 12.1% at the end of 2019.

Getting employees back into offices hasn’t been easy for some employers. In some cases, employees are protesting return-to-office mandates, such as at X, the website formerly known as Twitter.

After a high-ranking X official said that “if you can physically make it to an office and you don’t show up, resignation accepted,” one worker in defiance reached out to his colleagues on Slack and and encouraged them not to resign but instead wait to get fired. (That employee got fired and then filed a complaint with the National Labor Relations Board.)

And since demand for office space will likely remain weak, building activity is expected to adjust accordingly.

“Office construction will slow to the lowest level since 2014, raising the prospect of a shortage of available Class-A space later in the year,” the firm said.

Treasury’s analysis said “codification of work-from-home in future employment agreements, continued increases in office space available for sublet, continued low actual worker occupancy of office space, downsizing of firms’ office space requirements in new leases, continued deterioration in the value of office REIT stocks, and increases in delinquencies and defaults in the office sector” are all signs that office buildings might just be spiraling into oblivion.

Biden’s top economist bets on soft landing as recession fears fade

President Joe Biden’s top economic adviser sounds increasingly confident that the American economy will avoid the recession that so many had penciled in, my colleague Matt Egan reports.

“Recent data certainly give more evidence that the width of the runway for a soft landing has gotten much bigger,” Lael Brainard, director of the National Economic Council, told reporters on Friday.

Squashing inflation without throwing the economy into recession is what’s called a “soft landing.” It’s something the Federal Reserve has only achieved once in the past 60 years, at least by most metrics. (Some research argues the central bank has done it more often.)

Brainard, previously the No. 2 official at the Federal Reserve, stopped short of outright saying a recession is not in the cards. But she pointed to a variety of metrics – cooling inflation, rising real wages, easing interest rates and a growing supply of workers – to make the case that a soft landing looks increasingly likely.

“Of course, there are always risks. There will always be risks. Right now, we can see geopolitical risks and there could be other risks,” Brainard said.

The White House official noted that, just a year ago, many economists thought a recession was inevitable.

Read more here.

Up Next

Monday: The National Association of Home Builders releases its Housing Market Index for December. The Bank of Japan announces its latest monetary policy decision.

Tuesday: Earnings from FedEx and Ark Restaurants. The US Commerce Department reports housing starts and building permits in November. The UK’s Office for National Statistics releases November data on inflation.

Wednesday: Earnings from Cal-Maine Foods, Micron and General Mills. The Conference Board releases its December consumer survey. The National Association of Realtors reports existing-home sales in November.

Thursday: Earnings from Nike. The US Commerce Department releases its final estimate of third-quarter gross domestic product. The US Labor Department reports the number of jobless claims in the week ended December 16.

Friday: The US Commerce Department releases November data on household income, spending and the Federal Reserve’s preferred inflation gauge, in addition to new orders for durable goods. The University of Michigan releases its final reading of consumer sentiment in December. The US Commerce Department reports new home sales in November.

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