Office Real Estate Losses Will Hit $1 Trillion, Barry Sternlicht Says

The ailing office market is headed for $1 trillion of losses, billionaire and Starwood Capital CEO Barry Sternlicht said. 

Per Bloomberg, Sternlicht said at the Global Alts conference in Miami Beach that US office properties, once a $3 trillion market, are worth about $1.8 trillion now. The cratering values have been the result of remote work being solidified as a lasting legacy of the COVID-19 era. 

The billionaire characterized the dilemma facing the office segment of the commercial property market as an “existential crisis” and slammed the Federal Reserve for leaving a “serious mess” in capital markets and the real estate market. 

The fourth quarter of last year saw the US office market mark its fifth straight quarter of negative net absorption of office space. With 5 million square feet of new supply, the overall office vacancy rate rose to a 30-year high of 18.6%, according to CBRE.  

Pandemic-induced work-from-home trends persist with no clear reversal in sight. Meanwhile, concerns are growing over a surge in commercial real estate debt, estimated at nearly $1.5 trillion for loans maturing in the next few years.

The Fed’s aggressive rate hikes since 2022 have led to hurdles to refinancing commercial mortgages, as property owners must look for new debt at higher rates and backed by offices whose values have crumbled. 

President Joe Biden’s administration has encouraged developers to turn unwanted office buildings into apartments to ease the US housing shortage, though such redevelopment is expensive and not feasible for all buildings.

Analysts at Capital Economics this month predicted that office buildings still have another 10% price plunge ahead, and the total peak-to-trough loss for US office values will amount to 20%.