Struggles of Older Office Towers in Urban Areas
Commercial Real Estate Market Challenges
The commercial real estate market is facing significant challenges, particularly for older office towers in downtown metropolitan areas. The high-interest-rate environment has exacerbated the mismatch between the funding needs of building owners and available credit. This is compounded by high tower vacancy rates across many markets due to the increasing trend of remote work.
Zombie Towers in Major Cities
Bloomberg has highlighted the issue of aging business districts in cities such as Los Angeles, Chicago, and Boston. These "zombie towers" have high vacancy rates and no use in the current economy. Major landlords, including Brookfield, Blackstone, and Starwood Capital Group, have abandoned older downtown towers in recent quarters.
Crash in Office Values
Recent data from MSCI reveals that office values in metropolitan areas have plummeted 52% from their peak. The most severe declines have been observed in San Francisco, Manhattan, Washington, and Boston.
Decline in Demand for US Offices
Between 2019 and 2023, approximately $557 billion of value disappeared from US offices due to a multi-year decrease in demand. Older towers are rapidly falling out of favor with companies. According to estimates by economists at Columbia and New York universities, only 2% of towers in the US are considered top-tier, with rents 84% higher than the rest of the market.
Slow Growth in Business District Rents
Brokerage Savills' data shows that office rents in business districts have grown slower than rents for similar buildings outside metropolitan areas.
The Future of Older Towers
The shift to new towers implies that the economic bubbles in legacy downtown districts have burst. Older towers may need to be demolished. Ruth Colp-Haber, CEO of Wharton Property Advisors, a New York brokerage, states that landlords of old towers are under immense pressure as securing financing for renovations in today's high-rate environment is extremely challenging.
Case Study: Baltimore City
An office tower in crime-ridden Baltimore City, built in the 1960s in a business district, was sold at auction for only $4.4 million. This is indicative of the collapse in tower prices in the city over the last few years.
Is There a Crisis?
Despite attempts by some to downplay the situation, it's clear that there is a crisis. The population of the city has recently plummeted to a 100-year low, and violent crime remains a significant issue.
Shift of Operations
Wealth management and investment banking firm Stifel Financial has been discussing the latest shift of operations from the struggling business district to a new tower in a safer and newer district. Initially, Stifel considered leaving the city for the suburbs due to the inability of city officials to enforce law and order.
Bottom Line
While some experts suggest that commercial property valuations are nearing their bottom, others warn that we're still in the early stages of distressed commercial real estate assets. The commercial real estate market is in desperate need of substantial interest rate cuts. What are your thoughts on this situation? Do you think the older office towers in cities can bounce back, or is this the end of an era? Share this article with your friends and let us know your views. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.
