How A Real Estate Crisis Could Hurt The Job Market

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Remote work—in addition to federal interest rate hikes—has inadvertently led to a potentially big problem: a significant increase in empty commercial real estate office buildings. This trend has raised serious concerns about its possible impact on the economy, commercial real estate, the banks that issued the loans, as well as the job market. Additionally, the pivot to remote work has affected businesses that rely on the patronage of office workers, such as restaurants and mom-and-pop shops, leading to economic challenges in downtown urban locations.

Banks are reportedly facing $160 billion in losses on commercial real estate loans, according to a working paper published by the National Bureau of Economic Research.

The report reveals there is currently a 10% to 20% default rate on commercial real estate loans, equivalent to between $80 billion and $160 billion in bank losses.

“This evidence suggests that if interest rates remain elevated and property values do not recover, default rates could potentially reach levels comparing or even surpassing those seen during the Great Recession,” said the researchers at Columbia, Northwestern, Stanford and the University of Southern California.

In a note to clients last year, investment bank Morgan Stanley said that there is $1.5 trillion of commercial real estate debt that’s coming due before the end of 2025, Bloomberg reported.

With the commercial real estate market facing default, this poses a grave threat for the banking industry.

Banks and other financial institutions that loaned large sums of money to real estate developers could face losses if those developers default on their loans. This could lead to widespread job losses in the financial sector and potentially trigger a broader financial crisis.

How Did We Get Here?

When interest rates were low, many companies, especially within the tech sector, aggressively overhired. Then, during the Covid-19 pandemic, organizations were forced to adopt a remote and then hybrid work style. Unfortunately for the landlords and real estate developers, having fewer workers in the office posed a dire threat to their businesses.

For example, San Francisco-based tech companies actively promoted remote work. Jack Dorsey, the CEO of Twitter—now X—at the time, famously led the charge by saying his staff can work from home forever. One of the unintended consequences was that most workers didn’t commute into the office as much anymore.

This fast-growing trend created a challenge for the commercial real estate market and the ecosystem of restaurants, bars, hair salons, gyms, mom-and-pop shops and retail chain stores that were relied upon by the office workers.

As fewer people ventured into the city, it became more deserted, beset by crime, drugs and lawlessness flourished. This persuaded others not to go into an office building or for other reasons, creating a cascading downward spiral. The once-bustling skyscrapers suddenly became nearly vacant.

What Could Happen To The Job Market?

Without the steady flow of foot traffic, mom-and-pop shops and an array other local businesses within close proximity to office buildings will be forced to shutter, as they don’t have enough customers to keep them afloat.

As demand for space declines due to shifts in work habits and consumer behavior, this could lead to a significant devaluation of commercial properties, which translates to reduced property tax revenues for municipalities. This means less hiring and accelerated job cuts to police officers, firefighters, sanitation workers, mass transit personnel, nurses and teachers.

Bank exposure to real estate defaults could lead to financial stress, which may result in financial institutions implementing tighter lending standards, reducing credit availability and enacting potential job cuts.

Furthermore, a challenging commercial real estate market could mean layoffs for developers, construction workers, architects, engineers, real estate agents and property managers.

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