The economy is facing multiple challenges this year, but among the top issues is the condition of commercial real estate—at least according to Elon Musk.
Key Details
- A global capital markets newsletter, the Kobeissi Letter, reported that more than $2.5 trillion of real estate debt will mature in the next five years.
- “Refinancing these loans is going to be incredibly expensive and likely lead to the next major crisis,” the Letter tweeted. “The worst part? 70% of commercial real estate loans are owned by small banks. Rapidly rising rates are teaching everyone a valuable lesson. There’s no such thing as ‘free’ money.”
- The Letter blamed part of this impending crisis on rising interest rates.
- In response to the Letter’s comments, Twitter CEO Elon Musk tweeted, “This is by far the most serious looming issue. Mortgages too.”
Why it’s news
Commercial real estate owners have struggled to maintain their building occupancy levels as more businesses direct employees to work from home part-time or full-time. Fewer employees in the office could cause problems for commercial real-estate owners, especially during a time of upheaval in the banking industry. Property values have declined since fewer businesses need large office spaces, leaving building owners stuck with large, unprofitable buildings.
The Letter blames the current difficulties with commercial real estate on the Fed’s aggressive interest rate hikes. Its Twitter thread continued, “Rapidly rising interest rates seem to be sending ripple effects throughout the economy. From the bank crisis to a commercial real estate crisis, the Fed plays a major role. Meanwhile, rates are still rising.”
Increasing remote work opportunities certainly plays a role in empty office buildings. Musk has previously expressed his distaste for remote work and pushed for workers at his companies, including Twitter and Tesla, to return to the office full-time, Fortune reports.
Office buildings are a fragile point in the commercial real estate sector due to the low occupancy rates. Owners of these buildings could face difficulties in the future as high rates will make refinancing or selling a nearly impossible task.
Backing up a bit
As more offices convert to a remote-work system, buildings in business districts sit empty, but some building owners and architectural firms are coming up with creative ways to repurpose these empty spaces.
Over the next seven years, 330 million square feet of unused office space could exist, directly tied to the growing trend of remote work, according to a report from real estate firm Cushman & Wakefield.
Around 80% of available office spaces are currently leased to a tenant. The amount of space actually being used is closer to 50%, says architectural services company Ashford Inc.
Printing company Cimpress reworked its office spaces in 2021 to focus more on collaborative spaces rather than individual office spaces. Similarly, software company Atlassian revamped its office space to create more common areas, add phone booths for private calls, and include “focus” pods.
In early 2020, Amazon repurposed several floors of its downtown Seattle headquarters as a permanent homeless shelter. The shelter takes up eight floors and includes an industrial kitchen, recreational spaces, and room for Amazon’s legal team to support residents.
One of the most popular ways to repurpose old office buildings is to convert them into residential living spaces or mixed-use buildings.
