What’s next for commercial real estate?

Capital Economics, for its part, predicts another $480 billion wipeout in commercial real estate values next year, and another $120 billion loss in 2025, for a 24% peak-to-trough value decline. 

The failure of a mass return-to-office is the poster child for the woes of commercial properties post-pandemic. But the sector encompasses much more than just office buildings, which are undergoing their own existential shift. As Moody’s Analytics’ head of commercial real estate analysis told Fortune, “the story of office isn’t a story of mass obsolescence, it’s more of a ‘it’s going to take time for it to normalize and discover what it is in the future.’”  

More distress in office

The prospects for such a normalization, though, is getting more challenging. This summer, Kiran Raichura, Capital Economics’ deputy chief property economist, predicted office values would plunge 35% by the end of 2025. As of early December, his prediction changed for the worse. Capital Economics now expects office values to fall more than 40% peak-to-trough by the end of 2025, with no recovery even by 2040. 

Raichura cites higher interest rates in the longer term than initially expected. If you think back to the 2010s, he says, real rates (i.e., interest rates adjusted for inflation) were…