Yesterday, I had the opportunity to attend an interesting real estate investor conference focused on hedge funds, lenders, and owners. The main topic of discussion was regarding landlords, specifically those who did not own top-tier properties, and their restricted access to loans. They would only be able to secure loans at extremely high interest rates, approximately 15%, which is more than double the rates they are currently receiving. The situation seemed nearly impossible for them.
This situation brings attention to a significant threat to America’s resilient economy. Major banks and technology companies have recently mandated a return to the office for at least three days a week. While we are still awaiting post-Labor Day statistics on employee attendance, both nationwide and in New York, current attendance rates hover just below 50% for the summer. If these trends continue, we can expect an increase in defaults, which would create a dangerous triangle involving banks with rising default rates on office loans, building owners with failing properties, and cities with declining tax revenues. This puts the entire system at risk.
However, there is also the possibility of a soft landing, which seems within reach. This is why Jamie Dimon’s insistence that JPMorgan Chase employees return to work, citing increased productivity, is not just a matter of self-interest but also a legitimate concern. It is worth noting that employers are facing backlash as they try to enforce this return to the office. While there has been optimism that more employees will return after Labor Day, the situation remains uncertain. Anecdotal observations suggest that midtown Manhattan is seeing more people, but downtown still seems to be struggling. It may be necessary to explore more creative approaches, such as offering short-term tax credits for employers and employees, as well as discounted or free transportation, to encourage employees to come back to the office.
Contrary to previous claims that working from home led to increased productivity, some studies are now being retracted. One example is the research paper by Nicholas Bloom from Stanford University, which found that fully remote working was only 10% more productive than fully in-person working. The paper highlighted challenges in remote communication, teaching, building a culture, and self-motivation as factors that affect productivity. This raises skepticism about the initial statistics that supported the idea of increased productivity from remote work. It’s important to question who maintains and contributes to these statistics and what biases they may have. While it is known that efficiency decreases when employees are not in the office, there is also the benefit of lower real estate costs when companies occupy less office space. It’s a delicate balance that needs to be evaluated.
The battle for the future of the office continues. Management is exhausted from continuously pushing absent employees to return, while many employees want to maintain the flexibility of remote work. According to a WFH Research survey, the percentage of employees working from home has remained stable at around 28% for several months. These dynamics create a challenging situation that demands attention.
According to Trepp CMBS Research, the special service rate for office real estate has been rising steadily. In August 2023, it climbed another 39 points to reach 7.72%. This represents a significant increase of 456 basis points compared to August 2022, indicating increasing risks as loans approach maturity and buildings need refinancing. This metric emphasizes the growing stakes in this important story of city life as time passes. Simply converting a few office buildings to residential use would be a welcome change, but it would still be far from solving the larger systemic problem. The health of our cities and banking systems hinges on finding a solution.
As the CEO of Wharton Property Advisors (WPA), a woman-owned real estate consultancy representing tenants renting office space in New York, I have been involved in over 500 office leases in the city over the past 28 years. WPA is also a partner in an exclusive global network of real estate agents that represent tenants in approximately 70 cities worldwide. Additionally, I am a property counselor and Fellow of the Royal Institute of Chartered Surveyors. My expertise has led to consultations with major media organizations globally, and I am recognized as a thought leader and analyst of future trends in the industry. For more information, please visit WPA’s website at www.whartonproperties.net or contact me at ruth@whartonproperties.net.