Debt time bomb about to explode in world empty office real estate

‏PGIM Real Estate، a unit of Prudential Financial، warns that Debt time bomb about to explode in the world empty office real estate as the values for institutional-quality offices are down in the US with % 27 declining since March 2022، when interest rates started going up، while apartment building prices have tumbled % 21 and malls are off %18، and office prices are expected to fall over % 25 in Europe as well as almost % 13 in the Asia-Pacific region before hitting a trough.

Owners of empty office real estate are walking away from their debts

PGIM Real Estate stated that the Debt time bomb in empty office real estate is about to explode since the owners of gleaming office towers in New York and London، are walking away from their debt rather than pouring good money after bad، while the landlords of downtown San Francisco’s largest mall have abandoned it and a new Hong Kong skyscraper is only a quarter leased.

PGIM Real Estate explained that the reason of the Debt time bomb in empty office buildings is that after a long buying binge fueled by cheap debt، owners and lenders are grappling with changes in how and where people work، shop، and live in the wake of the pandemic، while at the same time، higher interest rates are making it more expensive to buy or refinance buildings.

About $1.5 trillion of US commercial real estate loans are due this year and next

PGIM Real Estate revealed that the tipping point is coming for the Debt time bomb in empty office properties، as in the US alone، about $1.5 trillion of commercial real estate loans are due this year and next، and when the deadline arrives، owners facing large principal payments may prefer to default instead of borrowing again to pay the bill.

Major institutional owners including Blackstone، Brookfield and، Pimco have already chosen to stop payments on some buildings because they have better uses for their cash and resources، and the number of transactions is plunging، and when deals do happen، the price declines are stark، according to PGIM Real Estate.

Commercial real estate crisis is like a dark seam running through the global economy

PGIM Real Estate indicated that the Debt time bomb in empty office real estate is about to happen because the creeping rot inside commercial real estate is like a dark seam running through the global economy، even as stock markets rally and investors are hopeful that the fastest interest-rate increases in a generation will ebb، the trouble in property is set to play out for years.

PGIM Real Estate sees that part of the crisis is arguably tied to the Great Recession as among the prescriptions for recovery back in 2008 was lower interest rates but over time، cheap money poured into real estate and cities all over the world were transformed، however in 2020، pandemic lockdowns emptied out buildings and many of those tenants have yet to return that this year، commercial real estate loans are becoming a big problem for landlords، the banks who lent them money and soon maybe everyone else.

Debt time bomb in empty office buildings due to low interest rates and pandemic lockdowns

PGIM Real Estate warns of the explosion of the Debt time bomb in empty office real estate as low interest rates sent money pouring into real estate، and pandemic lockdowns emptied out business districts and tenants have been slow to return، so that now commercial real estate is in trouble، and the consequences may extend across the global economy and world's empty office buildings have become a debt time bomb.

Commercial real estate’s woes will add to the stress on a financial system that’s already reeling from this year’s crisis in regional banks، and as the downturn deepens، it stands to have a transformational impact on some cities as they contend with empty buildings and lower property tax revenue، added PGIM Real Estate.

Another banking crisis is looming because of empty commercial real estate

Another banking crisis is looming as a combination of nasty events has produced a hellish-perfect-dumpster-fire-storm" for investors in commercial real estate، landlords، and their financiers، while building owners are slowly accepting the idea that، thanks to remote and hybrid work، their office properties are unlikely to fill up again and are therefore worth only half what they paid for them.

In the extreme case of San Francisco، office vacancies have hit 33 %، more than eight times the pre-pandemic level and the combination of plummeting occupancy and higher interest rates will make refinancing tougher for property owners، who may simply hand back the keys، while banks could end up with lots of offices to try to sell at deep discounts bringing back memories of the global financial crisis.

Delinquencies could cut commercial real estate values by 40 %، worse than in the Great Financial Crisis

PGIM Real Estate concluded that the recent banking crisis will only exacerbate the existing lack of liquidity as banks tighten lending standards as interest rates are 450 basis points higher than they were a year ago، so that delinquencies could cut commercial real estate values by 40 %، worse than in the Great Financial Crisis.

Unfortunately، the wall of Debt time bomb is set to get worse and the number of loans coming due will continue to rise over the next four years، peaking at $550 billion in 2027 but banks also own more than half of the commercial mortgage-backed securities and bonds that are backed by commercial mortgages، while prices for those bonds have deeply dropped، PGIM Real Estate.