Hi, I'm Carl Tannenbaum, Chief Economist for Northern Trust. We recently moved to a new office building. Packing and unpacking are never fun, but our new quarters are very nice. Unfortunately, management rejected my request for mahogany paneling and a private fitness center. Instead, I got drywall and an invitation to run outside when winter is over. 

Our relocation, part of an effort to consolidate our corporate footprint, is not at all unique. The expansion of hybrid work has caused a recession in demand for office space. Workplace attendance has peaked at about 50% of the pre-pandemic level, leaving acres of vacancy and rents under substantial downward pressure. 

Loans made to finance office properties have consequently come under pressure and under heightened scrutiny. Regulators have identified commercial real estate as a potentially systemic risk. While the situation merits close watching, there are few mitigating points to keep in mind. 

First, not all commercial real estate is created equal. Apart from office property, this category includes industrial space, apartment complexes, and retail developments. These latter categories are performing relatively well. Vacancy rates have been stable, and rents are growing at a good pace. 

Secondly, not all office property is created equal. While our imaginations often go straight to towers and city centers, the median office building is only a few floors tall. Nearly 2/3 of office properties are at least 90% leased, while only about 7% are leased at 50% or less of capacity. It is those latter buildings and those who leant against them that are most likely to experience distress. 

Third, banks maintain reserves for loan losses. In general, CRE reserves are in line with estimates of changes in value. Most firms have been adding to these reserves steadily over the past two years. CRE loans typically have a five-year maturity, which affords lenders some time to prepare. 

For all of these reasons, simple comparisons of commercial real estate loans to a bank's capital base can be very misleading. While some firms will experience more distress than others, the industry should be well positioned to deal with the office bust. I am hoping that the top floor in our new building opens up so that I can make the case for an Olympic-sized swimming pool. That would really put the property underwater. And that's the view from here.