And that comes amid an unprecedented fast jump in the Federal Reserve’s (Fed) key interest rate and now a potential bank credit crunch. Brookfield Corporation and Pacific Investment Management Co (PIMCO) have already defaulted on office mortgages in recent months, and there is a looming wall of around US$180 billion ($238 billion) of office mortgages coming due this year.
The US office market faces a tough road ahead. Corporate tenants are considering scaling back, higher interest rates are hurting valuations, and many property owners face looming debt maturities that they may struggle to refinance. That’s all concerning, but just how bad can it get? Private and public markets disagree to a jarring extent, and the truth is probably somewhere in the middle.
First, consider the physical market — also known as the real world. The pandemic unleashed drastic changes in remote and hybrid work, and they’re turning out to be surprisingly durable. Office badge-ins are still well below pre-pandemic levels, and many companies are reconsidering their real estate needs. Others are reallocating employees to parts of the Sun Belt (which comprises the southern tier of the US) to address changing geographic preferences.
