Commercial real estate could see crisis as office space goes unused

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2 years ago

April 13, 2023

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close video Commercial real estate industry on edge as downtown empty office space goes unused

Some financial analyst worry that the commercial real estate industry is in danger due to the increase of vacant office space with the rise of remote work.

Some Morgan Stanley financial analysts say the commercial real estate industry could be headed for a crisis worse than the 2008 great recession. This comes after businesses have left downtowns across the country with an increase in remote work and higher interest rates.

Many downtown buildings are owned by investment firms who rely on bank loans. But with businesses not renting as much office space and rising interest rates, some worry these firms may not have the money to pay back the banks.

In downtown Minneapolis, people are returning to see the Minnesota Twins play ball, attend a concert or catch a Broadway show.

"As we sit here today, we're really beginning to move in a positive direction," Steve Cramer, president and CEO of the Minneapolis Downtown Council and Downtown Improvement District, said. "Like all downtowns, that pandemic hit like a ton of bricks and things really shut down. Then we of course, had the murder of George Floyd here in our city and that caused civil unrest here, and had implications around the country, around the globe. And so we've really been kind of working our way back from that set of events in 2020."

INVESTORS RETREAT FROM COMMERCIAL REAL ESTATE BONDS

Employees working in downtown Minneapolis use the skywalk to avoid the chilly weather. The Minneapolis Downtown Council says about 65% of people are coming into the office at least once a week, up from 50% in 2022. (Mills Hayes/Fox News / Fox News)

Cramer worries about the office buildings that are 30 to 40 years old.

"We have to focus some attention on what can a new life for those buildings be? Maybe they can be converted into residential units," Cramer said. "The newer buildings with amenities, I think are going to do just fine in attracting the office demand."

Last week AT & T announced it was leaving downtown Minneapolis for the suburbs.

"The move will be complete by the end of August, allowing us to use our office space more effectively. It’s important to note that these jobs will remain in the greater Minneapolis area, and we remain committed to Minnesota," Clay Owens, director of public relations for AT&T, said.

Andy Babula is the Director of the Real Estate Program and the Shenehon Center for Real Estate at the University of St. Thomas.

"People are working from home a lot more now. If they do want to go into the office, they're going to want somewhere nearby," Babula said about the decision to move to the suburbs where many employees tend to live.

CBRE Global Commercial Real Estate Services says office vacancy rose during the 2008 financial crisis, but it was led by a recession. This rise is vacant office space is driven by a structural shift from the pandemic to remote work. (Fox News / Fox News)

According to CBRE Global Commercial Real Estate Services, in New York City there has been a 7.6% increase in empty office space since the pandemic. In Seattle, an 8.2% increase and in San Francisco, a whopping 25.4% increase.

COMMERCIAL PROPERTY DEBT CREATES MORE BANK WORRIES

CBRE says that San Francisco has a large amount of tech tenants, and they have viewed returning to work in person differently. Many employees are asked to come back to work on a more voluntary basis, which explains why they saw such a sharp increase in empty office space in comparison to other cities.

People who live in downtown Minneapolis say empty office space surrounds them. (Mills Hayes/Fox News / Fox News)

In Minneapolis, there’s only been a 2.1% increase in empty space, but some worry the problem could get worse.

"If the pandemic started three years ago, people may still have a few years left on their lease. So, over the next couple of years, we are going to be seeing these leases expire and companies as they expire will likely either vacate or downsize," Babula said.

Babula also said there is concern that the value of the buildings will decrease and impact the tax base.

US REAL ESTATE HAS ‘MONUMENTAL OPPORTUNITY’ TO SOLVE HOUSING CRISIS IN 2023: EXPERT

"The city like Minneapolis is going to collect less taxes from every building downtown if its value is lower by 20 to 30%. That's less taxes in their pocket, and that has to then get shifted to others in the city, to the residents and other businesses throughout the city. So that's a concern as well," Babula said.

With less demand for office space, investment firms who own these downtown buildings may not have enough money to pay off their loans to the banks.

In quarter one of 2020, Seattle had 9.4% of empty office space in downtown. By 2023, that number has grown to 17.6 % of empty office space. (Fox News / Fox News)

"Do we believe that we're going to see defaults? Absolutely. Are we keeping a close eye on the banks that hold a lot of these loans? Absolutely, but generally we believe that we are going to be able to come through the other end of this with some scratches and bruises, but nothing that is going to drive the collapse of the banking system," Julie Whelan, head of global head of occupier thought leadership at CBRE, said.

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Whelan said downtowns are not dying by any means, they're just going through an evolution right now. Many are shifting towards a footprint of more residential, retail and entertainment to make up for the office crowds leaving.

"If the different sides of the private sector and the public sector can come together and create an impetus drive to change in our cities that we’ll actually come out feeling stronger when we look ahead 10 years from now," Whelan said.

Business

Surprise rise in inflation as summer travel pushes up air fares

Published

2 hours ago

August 20, 2025

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Surprise rise in inflation as summer travel pushes up air fares

Prices in the UK rose even faster than expected last month, reaching the highest level in 18 months, according to official figures.

Inflation hit 3.8% in July, data from the Office for National Statistics (ONS) showed.

Not since January 2024 have prices risen as fast.

It’s up from 3.6% in June and is anticipated to reach 4% by the end of the year.

Economists polled by Reuters had only been expecting a 3.6% rise.

More unwelcome news is contained elsewhere in the ONS’s data.

Train tickets

Another metric of inflation used by government to set rail fare rises, the retail price index, came in at 4.8%.

It means train tickets could go up 5.8% next year, depending on how the government calculate the increase.

This year, the rise was one percentage point above the retail price index measure of inflation.

These regulated fares account for about half of rail journeys.

Why?

Inflation rose so much due to higher transport costs, mostly from air fares due to the school holidays, as well as from fuel and food.

Petrol and diesel were more expensive in July this year compared to last, which made journeys pricier.

Coffee, orange juice, meat and chocolate were among the items with the highest price rises, the ONS said. It contributed to food inflation of 4.9%.

What does it mean for interest rates?

Another measure of inflation that’s closely watched by rate setters at the Bank of England rose above expectations.

Core inflation – which measures price rises without volatile food and energy costs – rose to 3.8%. It had been forecast to remain at 3.7%.

It’s not good news for interest rates and for anyone looking to refix their mortgage, as the Bank’s target for inflation is 2%.

Whether or not there’ll be another cut this year is hotly debated, but at present, traders expect no more this year, according to data from the London Stock Exchange Group (LSEG).

Economists at Capital Economics anticipate a cut in November, while the National Institute of Economic and Social Research (NIESR) expect one more by the end of the year.

Analysts at Pantheon Macroeconomics forecast no change in the base interest rate.

Political response

Responding to the news, Chancellor Rachel Reeves said:

“We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”

Shadow chancellor and Conservative Mel Stride said, “Labour’s choices to tax jobs and ramp up borrowing are pushing up costs and stoking inflation. And the Chancellor is gearing up to do it all over again in the autumn.”

Business

AI ‘immune system’ Phoebe lands backing from Google arm

Published

5 hours ago

August 20, 2025

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AI 'immune system' Phoebe lands backing from Google arm

An AI start-up which claims to act as an ‘immune system’ for software has landed $17m (£12.6m) in initial funding from backers including the ventures arm of Alphabet-owned Google.

Sky News has learnt that Phoebe, which uses AI agents to continuously monitor and respond to live system data in order to identify and fix software glitches, will announce this week one of the largest seed funding rounds for a UK-based company this year.

The funding is led by GV – formerly Google Ventures – and Cherry Ventures, and will be announced to coincide with the public launch of Phoebe’s platform.

It is expected to be announced publicly on Thursday.

Phoebe was founded by Matt Henderson and James Summerfield, the former chief executive and chief information officer of Stripe Europe, last year.

The duo sold their first start-up, Rangespan, to Google a decade earlier.

Their latest venture is motivated by data suggesting that the world’s roughly 40 million software developers spend up to 30% of their time reacting to bugs and errors.

Financial losses to companies from software outages are said to have reached $400bn globally last year, according to the company.

Phoebe’s swarms of AI agents sift through siloed data to identify errors in real time, which it says reduces the time it takes to resolve them by up to 90%.

“High-severity incidents can make or break big customer relationships, and numerous smaller problems drain engineering productivity,” Mr Henderson said.

“Software monitoring tools exist, but they aren’t very intelligent and require people to spend a lot of time working out what is wrong and what to do about it.”

The backing from blue-chip investors such as GV and Cherry Ventures underlines the level of interest in AI-powered software remediation businesses.

Roni Hiranand, an executive at GV, said: “AI has transformed how code is written, but software reliability has not kept pace.

“Phoebe is building a missing layer of contextual intelligence that can help both human and AI engineers avoid software failures.

“We love the boldness of the team’s vision for a software immune system that pre-emptively fixes problems.”

Phoebe has signed up customers including Trainline, the rail booking app.

Jay Davies, head of engineering for reliability and operations at Trainline, said Phoebe had “already had a real impact on how we investigate and remediate incidents”.

“Work that used to take us hours to piece together can now take minutes and that matters when you’re running critical services at our scale.”

Entertainment

Paul Weller suing former accountants after they stopped working with him over Gaza statements

Published

5 hours ago

August 20, 2025

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Paul Weller suing former accountants after they stopped working with him over Gaza statements

Paul Weller is suing his former accountants after they stopped working with him after he alleged Israel was committing genocide in Gaza, according to a legal letter.

The former frontman of The Jam, 67, has filed a discrimination claim against Harris and Trotter after the firm ended their professional relationship.

Lawyers for Weller say the singer-songwriter was told in March that the accountants and tax advisers would no longer work with him or his companies.

According to the letter, which was seen by the PA news agency, a WhatsApp message from a partner at the firm said: “It’s well known what your political views are in relation to Israel, the Palestinians and Gaza, but we as a firm are offended at the assertions that Israel is committing any type of genocide.

“Everyone is entitled to their own views, but you are alleging such anti-Israel views that we as a firm with Jewish roots and many Jewish partners are not prepared to work with someone who holds these views.”

Israel has vehemently denied claims of genocide.

But lawyers for Weller claim by ending their services, the firm unlawfully discriminated against the singer’s protected philosophical beliefs, including that Israel is committing genocide in Gaza and Palestine should be recognised as a nation state.

Weller said: “I’ve always spoken out against injustice, whether it’s apartheid, ethnic cleansing, or genocide. What’s happening to the Palestinian people in Gaza is a humanitarian catastrophe.

“I believe they have the right to self-determination, dignity, and protection under international law, and I believe Israel is committing genocide against them. That must be called out.

“Silencing those who speak this truth is not just censorship – it’s complicity.

“I’m taking legal action not just for myself, but to help ensure that others are not similarly punished for expressing their beliefs about the rights of the Palestinian people.”

The legal letter says Weller will donate any damages he receives to humanitarian relief efforts in Gaza.

Cormac McDonough, a lawyer at Hodge Jones and Allen, which is representing Weller, said his case “reflects a wider pattern of attempts to silence artists and public figures who speak out in support of Palestinian rights”.

Mr McDonough added: “Within the music industry especially, we are seeing increasing efforts to marginalise those who express solidarity with the people of Gaza.”

Sky News has contacted Harris and Trotter for comment.