Today’s low, low prices mean losses for some but downtown revivals for everyone.

How scary is the “urban doom loop”? Office buildings are selling for fire-sale prices — all over America. The trend has been especially eye-popping in San Francisco, New York, Chicago and Denver, where some buildings have gone for 90 percent discounts. It’s easy to assume downtowns are dying or, worse, that this could turn into another ugly financial crisis. But I see good news: These sales mark the start of downtown makeovers.

By now, everyone understands the basics of what’s happening. Office workers have fallen out of love with their offices. Most prefer working from home, at least some of the time. Efforts to force them back are largely failing, as are incentives such as free food and a desk with a nice view. For white-collar jobs, hybrid work is here to stay. This is why the U.S. office vacancy rate is 20 percent, a record high. Companies simply don’t need as much space.

There are actually two types of office buildings: the desirables (built in the past decade) and the old stuff (built in the 1970s, ’80s and ’90s). The desirables have big windows, fancy lighting, contemporary lobbies and “wow” rooftops or balconies. In most cities, these “Class A” properties, as they’re known in the real estate world, are almost fully occupied. The offices in trouble are the older ones that still look (and smell) like it’s 1994. These “Class B” and “Class C” buildings are the ones that are struggling to find tenants and quickly losing value.

Advertisement

Though it sounds grim, this office crisis isn’t big enough to spur a worldwide financial meltdown, as the home foreclosure crisis did in 2008-2009. The entire commercial real estate loan market is about $5 trillion. This includes warehouses, hotels, retail stores, apartments and other assets that are largely doing just fine. Offices make up only about $740 billion of the total debt, according to the Mortgage Bankers Association. (And remember: Some offices are snazzy new ones.) The residential home mortgage market, in comparison, was a whopping $10 trillion on the eve of the last financial crisis, with about $1.5 trillion of that in troubled subprime debt.

Follow Heather Long

A second key difference is time. The residential home loan crisis hit fast, stunning most investors. The office market downturn is a widely known, slow-moving crisis, and sellers have had time to plan. Also, banks learned a lot from 2008-2009; today, they keep more cash on hand to cover loans that default, and they aren’t so eager to foreclose. About $1 trillion of the $5 trillion commercial mortgage debt is........

© Washington Post