Empty buildings, tight credit, high interest rates set stage for commercial real estate collapse

While some employers imposed return-to-work policies as the coronavirus faded, many firms allowed workers to stay home or split their schedules, hollowing out downtown spaces from San Francisco to the District of Columbia. At the same time, the Federal Reserve hiked rates to the highest point in decades to tame inflation, making it difficult to refinance distressed loans.

Federal and local officials say it is no time to despair. They’re pushing big plans to convert office space into much-needed housing and make downtowns safer and more attractive. Located a half-mile from the White House, the building on Vermont Avenue recently sold for about $16 million. It last sold for $60 million in 2006. Its assessed value dropped from about $72 million in 2018 to under $50 million this year.

Prices for commercial real estate declined 5.3% in the final quarter of 2023 compared to the same quarter in 2022, according to The Trepp Price Property Index. JLL, a real estate services company, said it is important to differentiate among commercial properties. But for now, the tumult in the property market is sparking fears of a domino effect in the banking sector, particularly the small and regional banks that underwrite large numbers of loans for distressed commercial properties.

Howard Lutnick, chairman and chief executive of the financial services firm Cantor Fitzgerald, predicted in January there would be $700 billion to $1 trillion in commercial real estate defaults over the next two years unless interest rates fall quickly, dubbing it a “very, very ugly market.” In the District, worries about vacant office space are compounded by fears around rising crime, particularly carjackings, and city politicians are still mopping their brows after the Washington Capitals and Washington Wizards franchises nearly decamped from Capital One Arena downtown to northern Virginia.

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