Employees are still working from home. What does that mean for commercial real estate – and the industry?

We all know how severely the pandemic impacted the home furnishings sector. 

Specifically, it decimated the global supply chain, resulted in severe shortages of raw materials and finished goods, caused prices for everything from containers to groceries to spike and, of course, resulted in many of us sheltering in place for more than a year, which meant thousands of us set up home offices and worked from home.

The good news is that container costs have come down, the supply chain continues to untangle itself and consumers feel confident about venturing outside their homes now.

The possibly not-so-good news is that lots of us have opted not to go back to our offices and are continuing to work from home.

So, why might this be problematic? Initially, this shift in where we work is not our problem … at least not yet.   

However, it has become a growing problem for owners of commercial real estate who, since the pandemic, have been grappling with a steady loss of tenants.

And that trickle-down misery could hurt us as well.

According to a recent study from Pew Research, some three years after the COVID-19 pandemic upended U.S. workplaces, about a third (35%) of workers with jobs that can be done remotely are working from home all of the time.

Although an earlier study from Pew concluded that, while the share working from home all the time has fallen off somewhat as the pandemic has gone on, this new survey finds that 41% of those with jobs that can be done remotely are working a hybrid schedule — that is, working from home some days and from the office, workplace or job site other days. This is up from 35% in January 2022.

Among hybrid workers who are not self-employed, most (63%) say their employer requires them to work in person a certain number of days per week or month. About six in 10 hybrid workers (59%) say they work from home three or more days in a typical week, while 41% say they do so two days or fewer.

When looking at all employed adults ages 18 and older in the United States, Pew Research Center estimates that about 14% — or roughly 22 million people — are currently working from home all the time.

Clearly, owners of commercial real estate have found themselves with fewer tenants and steadily declining income. 

According to analysts at Morgan Stanley, some $1.5 trillion of domestic commercial real estate debt comes due for repayment before the end of 2025, and a growing question those borrowers face is who’s going to lend to them?

“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts wrote in a recent report.

The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.

Making the situation more dangerous is the fact that a growing number of owners of commercial real estate are throwing in the towel and handing the keys over to their banks, many of whom are regional.

This, coming on the heels of the demise of Silicon Valley Bank in California and the Signature Bank in New York could result in other banks and lending institutions pulling in their lending horns.

Recent comments from analysts at Wells Fargo, Citigroup and JPMorgan Chase all indicated their growing concern over the challenges facing owners of commercial office real estate, as property values fall and more borrowers default on loans.

Other observers added that rising interest rates and a sluggish economy are not helping the situation either.

While no one has a crystal ball to help predict the outcome, most financial analysts agree that ongoing concerns about the commercial real estate sector could have stark implications for both the banks, and ultimately the economy.

Ongoing defaults in the commercial real estate sector could easily result in a lockdown of credit and other lending, which, in turn, could impede sales of home furnishings and other durable goods.

According to a new survey from Katapult, an omnichannel lease-purchase platform that provides alternative payment solutions to merchants and consumers, more than three-quarters of consumers with non-prime credit scores or lower (78%) would use a flexible payment option to purchase gifts for themselves or others this holiday season, if offered by the online or physical stores where they shop.

Let’s face it. We are a credit-based sector and anything that threatens the availability of credit threatens us. 

Stay tuned. This story is far from over.

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