The $800 billion drop in value of office buildings in major cities that remote work caused during the COVID-19 pandemic may be just the tip of the iceberg, Wirepoints Executive Director Mark Glennon fears.
“The impact on commercial office space in Chicago and other big cities is extremely troubling,” Glennon told The Center Square of the findings highlighted in a new McKinsey Global Institute report. “Up until now, there’s been no answer to it.”
In Chicago, Glennon thinks half the problem stems from the fact that few have been willing to face the reality of the moment.
“The true occupancy rates numbers for office buildings here in Chicago are hovering around 50% while the official number is … around 75%,” he said. “The problem with that is as all these tenants come up for renewal,m they won’t be able to cover the costs or pay their property tax bills and the effect will be to reduce evaluations and the money lost will have to be pushed onto other property owners.”
As the need for office space continues to dwindle and vacancy rates rise, the current estimate for valuation losses represents a 26% decline compared to levels just four years ago, with McKinsey reporting the downturn has the capacity to grow to as much as 42%.
“The impact on value could be even greater if rising interest rates compound it,” the report added. “The bearing could increase if troubled financial institutions decide to more quickly reduce the price of property they finance or own.”
With Chicago having experienced an uptick as recently as in March, Glennon sees just one way out.
“To turn things around, I think Chicago would have to embark on a radically new direction of being as progressively pro-business as possible in order to attract more businesses,” he added. “Typically, as the economy grows, empty office space gets absorbed, but I don’t see any prospect for Chicago doing that because the city’s current leadership shows no interest. The only remedy they’ve tried has been trying to convert some office space into housing.”
In the end, Glennon wonders how much impact those efforts will have.
“I think that will have very limited appeal because the amenities anyone would want for a neighborhood, like green space and certain retail services, are not present,” he said.
