European office investors will be eyeing the US market carefully for any comparisons as some hawkish real estate professionals in North America begin to make grave assessments.
In an interview with CNBC Television, Patrick Carroll, founder and CEO of Carroll which has 33,000 multifamily units in North America, said: ‘Multifamily is going to be okay, fortunately, but the office market is going to be destroyed.’
‘The fundamentals of offices are terrible. After Covid, Work From Home means the working week is now Tuesday to Thursday, and so people are taking less office space, and no-one wants to lend on it - it is a disaster.’
Work From Home is becoming one of the most contentious issues in real estate. JP Morgan Chase, America’s largest bank, recently told employees via an internal memo that it is ending hybrid work for its senior staff.
‘Our leaders play a critical role in reinforcing our culture and running our businesses. They have to be visible on the floor, they must meet with clients… and they should always be accessible for immediate feedback and impromptu meetings.’
'There are a number of employees who aren’t meeting their in-office attendance expectations, and that must change,' the note reads, adding that managers would be responsible for taking 'corrective action' if employees failed to comply.
News organisations noted on Wednesday that the internal memo might have a secondary motive. A year ago, the bank revealed plans for a new global headquarters in New York City stretching up to 60 stories high. When it opens in 2025, it will have capacity for 14,000 staff.
Notwithstanding, real estate figures such as Carroll remains convinced the office sector is in trouble.
‘Once you allow people to work from home, they are never going back,’ he told CNBC.
‘People can work from home, especially back office jobs. It’s a disaster.'
‘Developers are going to have to figure out how to repurpose office buildings. It is here to stay.’
As well as real estate personalities, some organisations are publishing reports underlining how remote working practices are threatening offices.
PropertyEU reported on Tuesday how Bloomberg Intelligence found that prime offices in London and Paris may acutely feel the pain as a mix of falling values and widespread vacancy destroys the city networking vibe and leaves high-quality buildings empty.
Asked by CNBC anchors what would happen oin the US, Carroll said during his interview: ‘New York in going to have to figure out the office problem. It is the biggest office market in the world. Eighty percent of those buildings don’t make sense anymore.’
‘I think you are going to have cities step in and advise develoeprs to convert them to some better use.’
Stay alive ‘til 25
He also gave an insight into how major landlords may be thinking given the dearth of transactions in the face of US interest rate hikes that have already taken place.
‘Lenders are not willing to lend because they don’t know where rates are going.’
‘I talked to one of the biggest landlords in the world yesterday. He is a friend and mentor. What he is telling everybody is “stay alive till ’25,"'
‘What you have is a liquidity crisis. There is no debt available, cap rates have expanded to over 5% - a year ago they were at 3%. If you do the math, that is almost a 40% drop in value.’
‘No-one is willing to lend because they don’t know where rates are going and no-one knows how to value commercial real estate properties.’
He added: ‘Things have to bottom out and they haven’t yet. I read that there is $1.5 trillion of maturing US commercial real estate debt by 2025.’
‘Sellers are not realising how much their properties have lost value and they are not willing to dump their properties yet because they haven’t felt enough pain. But they are about to, because these lenders are spooked. It’s going to be ugly. It’s going to be at least as bad as 2008. People don’t want to say that. But the party is over.’
Fears of a commercial real estate crash have also been stoked by others.
For example, in a recent TV interview, Oaktree Capital’s co-founder and CEO, Howard Marks, said commercial real estate could present a systemic risk given the level of US mortgage defaults that could happen, and that is frightening banks.
