The Wall Street Journal (WSJ) reported on the 13th (local time) a case of vacancy in a supertall building in Manhattan, New York, which involved a project cost of $25 billion (approximately 32 trillion won). 'Hudson Yards,' built on a railroad yard near the Hudson River in Manhattan and established as a landmark of New York, remains half empty even four years after its completion. As of the end of last month, 50% of the entire 92-story building is vacant.
Home to luxury stores such as Cartier, Coach, and Dior, upscale restaurants, and office spaces for global companies like L'Or?al and Meta, this place gained fame as a tourist attraction with the honeycomb-shaped architectural structure called the 'Vessel.' However, prolonged vacancies have caused prices to be lower than the surrounding market rates. Right after the completion in 2019 and the start of leasing, the outbreak of the COVID-19 pandemic dealt a severe blow, and with aggressive monetary tightening pushing the commercial real estate market to its worst, it has been struggling for years.
As vacancy rates in supertall luxury buildings like Hudson Yards have surged, the losses in building value appraisals have also snowballed. Global consulting firm McKinsey Global Institute estimated in a report titled 'The Impact of the Pandemic on the Real Estate Market' released the day before that by 2030, the total building value appraisal losses will reach $800 billion (approximately 1,020 trillion won). Due to changes in work styles following the COVID-19 pandemic and interest rate hikes, vacancy rates of office spaces in major cities worldwide have surged, leading to a diagnosis that commercial real estate will face enormous appraisal losses.
This survey targeted nine global cities historically known for high real estate prices (New York, San Francisco, Houston, Paris, London, Munich, Tokyo, Beijing, Shanghai). McKinsey predicted that the demand for commercial real estate will remain below pre-pandemic levels for several years due to the combined effects of the spread of remote and hybrid work (a mix of remote and office work) and high interest rates. Demand is expected to decrease by at least 13% and up to 38% by 2030.
The estimated appraisal loss of $800 billion by McKinsey represents a 26% drop compared to asset values in 2019. If additional interest rate hikes and other variables occur, the decline could expand to 42%. McKinsey stated, "The proportion of workers commuting to the office daily has dropped to 37% compared to pre-pandemic levels," and predicted, "The scale of losses could grow further." According to Green Street, a real estate data analytics firm, the value of U.S. commercial real estate has fallen by 27% since the Federal Reserve (Fed) began raising interest rates in March last year.
The commercial real estate market is unlikely to rebound anytime soon. After the sharp decline following the 2008 global financial crisis, it took six years for commercial real estate values to recover. Richard Barkham, Global Head of Research at CBRE, a commercial real estate services company headquartered in Texas, said, "In this downturn, the recovery period could extend up to 10 years."
In preparation for the prolonged recession, some are resorting to the drastic measure of converting empty office buildings into apartments. McKinsey stated, "As lease renewal periods approach, the trend of downsizing office space is expected to strengthen," and added, "Real estate developers and building owners are preparing for a prolonged downturn by converting office buildings into residential mixed-use buildings."
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