The Popularity of Working from Home Has Emptied Offices and Burdened Banks

The popularity of working from home has emptied offices in the United States (US), which is a cause for concern, as the value of commercial buildings is falling, and owners risk losses on real estate loans, which in turn pressures banks, especially smaller ones.

– There will be problems for banks, but not big ones – said the chairman of the Federal Reserve (FED) Jerome Powell.

In cities like San Francisco, Washington, and New York, offices in commercial buildings are half-empty, with half as many people as before the pandemic, and white-collar workers are reluctant to return to offices and daily commutes.

The vacancy rate for offices nationwide has risen from 9.5 percent in 2019 to 13.5 percent in 2023, and according to a report from credit rating agency Fitch, it is expected to rise to 16.6 percent.

– In many city centers, office districts are poorly filled – Powell said in Congress.

With empty buildings in cities of all sizes, merchants serving employees who used to work there are also under pressure, he added.

Lost Value

The change in work patterns has caused a loss of one-third of the value of the commercial real estate sector, which could have broader implications.

According to data from the Mortgage Bankers Association, of the $737 billion (€674 billion) in mortgage loans for office properties, $206 billion, or about a quarter, is due this year. This comes at a time when interest rates are the highest in over 20 years.

This indicates that loans will need to be refinanced, especially where vacancy rates are high in some cities.

In the US, it is customary for commercial loans to be renegotiated every three to five years. The risk is a ‘domino effect’ where banks ‘risk their borrowers defaulting and as a result experience stress on their capital,’ said EY’s chief economist Gregory Daco.

Financial System Stressors

Economic analyst Lael Brainard expects ‘stress,’ but not ‘wider implications for the financial system’ due to the crisis in the commercial real estate sector.

– We are talking about commercial spaces characterized by high vacancy rates due to changes in usage patterns – Brainard said.

While large banks can absorb losses, they could be a significant blow for smaller ones, Daco pointed out.

Pension funds or insurance companies, among others, could also be affected if they have commercial buildings in their portfolios.

Such institutions may be even more vulnerable, as they are not subject to the same regulatory requirements as banks.

Domino Effect

Governor Powell says the central bank is monitoring the situation with banks facing this risk.

– We have identified banks with high exposure to the commercial real estate sector, particularly offices and retail, and we are in dialogue with them – he said.

If properties sell for less than financial institutions anticipate,’this could trigger a domino effect that would force banks to reassess potential losses and reserve needs,’ explained the chief US economist at Oxford Economics.

This was one of the challenges faced by New York’s Community Bancorp when its shares fell last week.

In January, it reported a reserve of $185 million for the recently completed quarter, due to the deterioration of its real estate loan portfolio.

Michelle Bowman from the FED warned last month of the bigger picture where the problem of commercial real estate and loans will become long-term ‘if more people do not return to work in offices’.

The Situation in Croatia

The president of the Real Estate Business Association of the Croatian Chamber of Commerce Dubravko Ranilović says that the situation in Croatia is quite different and that ‘we lack offices’.

– In Croatia, we do not encounter this problem; we have only two to three percent of vacant offices – said Ranilović.

And while the US faces the risk of empty buildings, in Croatia, the average rental price per square meter of commercial space is 14 euros, although the price range is from 12 to 16 euros, says Ranilović.