Post-COVID Economics Put Strains on Office Real Estate

Daily Journal (May 5, 2023) High interest rates, recession concerns and changes in the way offices work following the coronavirus pandemic are weighing on commercial real estate developers and landlords. Downtown real estate is looking increasingly undesirable in some major cities, even as some property owners are suing commercial tenants that fell behind on rent during the government-ordered shutdowns. In Los Angeles, the owners of two downtown office towers defaulted on $784 million in loans this year, and analysts say lenders are reluctant to make further loans there, given the increased vacancies, higher crime and deterioration of the area. That exodus is a “flight to quality,” said John M. Tipton, real estate partner at Allen Matkins Leck Gamble Mallory & Natsis LLP. “Overall there is less demand but supply hasn’t changed. Rental rates drop. Tenants who couldn’t get into a class A building can now get in. The B office building is losing tenants to the A office; the C building is losing tenants to the B office building,” he said. C buildings are potential candidates for conversion to residential units but it can get expensive, Tipton explained. For example, office buildings have one or two bathrooms per floor, and earthquake codes differ from commercial to residential real estate. Read More (subscription required)