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  • Writer's pictureJonathan Anderson

Roses Are Not Blooming In Commercial Real Estate

Commercial Real Estate has always been the bedrock of institutional investment in the United States. In the decade leading up to the pandemic, commercial real estate saw an average return for institutional investors of 9.5%. This return increased to 11.8% for Real Estate Investment Trusts (REITS) according to S&P Capital Financial Services.

Since the forced pivot of companies during the pandemic (2020-2022), the outlook moving

forward is not so rosy. This pivot changed: how we work, how we live, and how we operate. It

also substantially changed the way we go about our business from small retail to corporate

America. The country learned quickly to adapt to working from home, which saved business

approximately $11,000 a year per employee or $700BN. The commercial real estate market is

likely to never fully recover.

Prior to the pandemic, vacancy in office product hovered around 12% nationally and ~8.5% in major metro markets. According to Capital Economics there is a substantial price drop in the six largest US commercial cities which are considered Major Markets. These include Boston, DC, New York, Los Angeles, Chicago and San Francisco. From 2024-2025 these markets are expected to see a decline of:

  • San Francisco: 40%-45%

  • Boston: 30%-40%

  • Chicago and New York: 30%-35%,

  • LA and Washington: 25%-30%

Tributary cities will see similar declines. Examples of tributary cities are Seattle, Portland,

Denver, Miami, Dallas and Atlanta. These valuations are primed for reduction as the work from home trend has settled with many businesses offering hybrid models and some just forgoing the return to office after realizing the savings. In addition, employees have greater flexibility in negotiating power which is forcing companies to make drastic decisions on how to shift their business models to meet these new demands. All these shifts circle back to the steep decline in office space needs. Reductions are seen across the board.

CoStar estimated that by the end of 2025 office vacancy would reach a national average of 19%. This prediction was made in 1Q23 and by the start of 2024 office vacancy was already 19.2%. Morgan Stanley backed these claims with office valuations coming in lower than the economic crash in 2008 with a 40% decline. While office product is taking the brunt of the headwind, all sectors are feeling this shift.

This shift has also led to owners and operators unable to refinance their subject properties

without adding additional capital. Industry practice for commercial real estate is having LTV at ~65%. With demand slowing and interest rates increasing it has been a perfect storm for


The average commercial real estate transaction is 36-Months. Based on this figure, interest

rates from the time of origination to February of 2024, saw without taking into consideration a margin, increase ~13.6K%.

This compounding affect caused a significant spike in defaults across the board as shown below:

What does this all mean for owner operators? It means more office space is sitting unused

currently than at any point since 1979. The surplus means more concessions (negative

impact), more rent abatements (negative impact), lower prices per square foot (negative

impact), more tenant buildout capital (negative impact) and more flexibility for firms

looking to reduce their office footprint (negative impact).

What does it mean for companies and their employees? They have all the options in the


Jonathan Anderson is a contributor for Degen Magazine. His interests lie in real estate, the economy, cooking, interesting things, and the market. Follow him on Twitter for more: @I_am_stockchef

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