Remote work surge empties offices, pressures smaller U.S. banks
WASHINGTON, UNITED STATES — The surge in remote work across the United States has led to significant vacancies in office buildings, raising concerns about potential losses on property loans and subsequent pressure on smaller banks.
Federal Reserve Chair Jerome Powell warned of possible bank failures.
“It’s really medium- and small-size banks that have these higher concentrations of troubled loans,” he said in testimony to the House Financial Services Committee.
“It’s going to be a problem we’ll be working through, I think, for several years.”
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In major cities like San Francisco, Washington, and New York, office attendance has halved compared to pre-pandemic levels. This has increased office vacancy rates to 13.5% in 2023 from 9.5% in 2019, according to credit company Fitch Ratings in a December report.
The shift has also affected downtown retailers who previously served office workers, exacerbating the problem.
The commercial real estate sector has seen a third of its value wiped out, with $206 billion of the $737 billion in office property mortgages due for maturity this year amidst high-interest rates, said the Mortgage Bankers Association.
This scenario poses a “chain reaction” risk, according to EY chief economist Gregory Daco, where banks could see borrowers default, impacting their capital.
Meanwhile, for National Economic Advisor Lael Brainard, the situation will lead to “stress” but not “broader implications for the financial system.”
“We’re talking about office properties where vacancies are high due to changes in patterns of work use,” she said. “It’s a narrow class within the broader commercial real estate.”
The Federal Reserve is actively engaging with banks that have high concentrations of commercial real estate loans, particularly in office and retail sectors, to mitigate potential impacts.
New York Community Bancorp recently had to secure over $1 billion in investments to address deteriorating real estate loan portfolios.
Fed Governor Michelle Bowman cautioned, “If we don’t see more people returning to offices (RTO) and to work, this is going to become a longer-term problem.”
Employees face challenges as they return to in-office work, with many spending the equivalent of a month’s grocery bill due to the transition, according to a BetterUp survey. The policy also causes significant disruptions in remote workers’ lives, said future of work expert Dan Schawbel.
As employees spend less time commuting to centralized workplaces, occupancy rates have plunged.
Commercial property giants like RXR CEO Scott Rechler have labeled it an “existential moment” and “crossing the chasm,” while Columbia Business School professor Stijn Van Nieuwerburgh described it as a “train wreck in slow motion.”
