The Far-Reaching Effects of Commercial Real Estate’s Downward Spiral

The Federal Reserve’s higher interest rates, the work from home trend, ESG distractions, increases in crime, etc., are having far reaching effects on our economy and investors.

Consider the “apocalypse” analysis from NYU and Columbia professors. The research combined working from home data with financial information from real estate investment trusts (REITs), plus other financial information, and predicted, “long-run office valuations that are 39.18% below pre-pandemic levels.”

Right now (May 25, 2023) both New York and San Francisco are reporting vacancy rates exceeding 30%. So, NYU and Columbia professors’ predictions may be pretty accurate. Because of the high levels of mortgage debt employed by real estate investors, top commercial real estate locations are rumored to only have 10% equity left in these properties.

The large amount of leverage used by commercial real estate investors means they are not the only ones that stand to lose a lot if commercial real estate continues this downward spiral. For example, what will happen to the already embattled banks if the commercial real estate market continues to devolve?