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Companies are defaulting on loan payments for unused office buildings


This week ends with good news about the U.S. jobs market. The economy added more than a quarter million jobs in April. The unemployment rate matched its lowest level in 54 years. What's the bad news? Well, many people are still working from home. What's bad about that? Offices are sitting empty, companies are giving up their leases, and that could be trouble for banks, especially regional ones. NPR's Arezou Rezvani joins us. Thanks so much for being with us.

AREZOU REZVANI, BYLINE: It's good to be with you.

SIMON: How are we defining the number of offices that are - what's the phrase? - sitting empty?

REZVANI: Well, with so much remote work still going, the typical office building has about half the number of people they normally do. And so companies, against this backdrop of high inflation, climbing interest rates and tightening credit from recent banking turmoil - they're shedding a lot of office space. The commercial real estate firm Cushman and Wakefield estimates that almost 20% of office spaces are vacant across the country right now. And that's a real milestone. It's greater than what we saw during the 2008 recession. And in some cities, the vacancy rate is much worse than that. In San Francisco, for example, where a lot of tech companies have really embraced remote work, the vacancy rate there right now is about 30%, which is a big problem for banks.

SIMON: Why banks in particular, in addition to real estate companies?

REZVANI: Well, if companies continue to give up their leases, analysts worry that those who own these office spaces won't be able to collect rent and make good on their loans from the banks. Many of those loans are coming due this year and next year. And for building owners to refinance now when interest rates are so much higher than when they took those loans out initially - you know, they're going to feel the squeeze. I asked Kenneth Rosen, chair of the real estate research firm Rosen Consulting Group, about this, and he didn't beat around the bush.

KENNETH ROSEN: I'd say the number one implication is going to be defaults and foreclosures.

REZVANI: Now, here's the thing about defaulting on those loans. The bulk of the $1.2 trillion in outstanding office space debt - it's owed to smaller regional banks, which, as we know, have been in the throes of some turmoil lately. Here again is Rosen on that point.

ROSEN: Regional banks - they may face, again, issues where their capital will be eroded by these losses that may make them not as profitable or even not viable.

REZVANI: So upshot is these regional banks are very exposed to swings in the office space sector and could take a real hit should offices remain empty.

SIMON: The way you explain it, Arezou, they're really vulnerable right now.

REZVANI: Yeah, that is true. I mean, analysts are talking about this as possibly being the next shoe to drop.

SIMON: Could this fallout go beyond banking?

REZVANI: Well, you know, it certainly seems like the era of hybrid work is here to stay. Workers and employers have adjusted. And with so much economic uncertainty, companies appear reluctant to declare a full-bore return to the office anytime soon. Now, because of this, we may continue to see high vacancy rates that have already altered the ecosystems of cities.

I talked to a longtime owner of a shoe repair shop here in downtown Los Angeles the other day in the financial district. His customers have long been lawyers or consultants who used to work in some of these corporate buildings. Because so many of them still work from home, it's taken a huge bite out of his business, and he's not sure he'll survive much longer. Many convenience stores, dry cleaners, restaurants - they're in the same boat because this return to the office everyone assumed was coming hasn't really come.

SIMON: NPR's Arezou Rezvani, thanks so much for being with us.

REZVANI: You're welcome. Transcript provided by NPR, Copyright NPR.

Scott Simon is one of America's most admired writers and broadcasters. He is the host of Weekend Edition Saturday and is one of the hosts of NPR's morning news podcast Up First. He has reported from all fifty states, five continents, and ten wars, from El Salvador to Sarajevo to Afghanistan and Iraq. His books have chronicled character and characters, in war and peace, sports and art, tragedy and comedy.
Arezou Rezvani is a senior editor for NPR's Morning Edition and founding editor of Up First, NPR's daily news podcast.