The skyline of downtown Los Angeles looks the same as it did five years ago. Glass towers still catch the sunset. From a distance, everything looks fine. But inside? It’s a ghost town. Honestly, the commercial real estate crash isn't coming—it’s been happening in slow motion for years, and we are just now hitting the messy part. People keep waiting for a 2008-style "pop" where everything vanishes overnight. Real estate doesn't work like that. It’s more like a slow leak in a massive ship. You don't notice the water until your feet are wet.
The numbers are pretty grim. Look at the Aon Center in LA. It sold for about $147 million recently. That sounds like a lot of money until you realize it sold for $268 million back in 2014. That is a 45% haircut. When a trophy asset in a major city loses nearly half its value, you aren't looking at a "market correction." You're looking at a fundamental shift in how humans use buildings.
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The Office Death Spiral
Remote work was the catalyst, but it isn't the only culprit. We’ve got a "triple threat" situation. First, the obvious: nobody wants to sit in a cubicle for 40 hours a week anymore. Second, interest rates spiked. When these massive developers bought these buildings in 2015 or 2018, they were getting loans at 3% or 4%. Now? They’re looking at 7% or 8% to refinance.
Think about the math for a second. If you own a $100 million building and your interest payment doubles while your occupancy drops by 30%, you don't just lose profit. You lose the ability to pay the bank. This is what Barry Sternlicht of Starwood Capital was talking about when he mentioned the office market is facing a "existential crisis." He estimated a $1 trillion loss in value for office properties alone. That isn't just a number on a spreadsheet; it’s pension funds, insurance companies, and regional banks that hold those loans.
Why Regional Banks Are Sweating
Most people think "Wall Street" when they hear about real estate. Wrong. It’s the small and mid-sized banks—the ones on your local street corner—that carry about 70% of commercial real estate debt.
Banks like New York Community Bancorp (NYCB) have already felt the sting. Their stock tanked because they had to set aside hundreds of millions for "expected" losses on commercial loans. It’s a domino effect. If a developer walks away from a building, the bank takes it over. But the bank doesn't want to manage an empty 40-story tower. They sell it at a discount, which lowers the "comparable value" for the building next door. Suddenly, every owner on the block is underwater.
The Retail and Industrial Twist
It isn't all bad everywhere, which is where the "crash" narrative gets complicated. If you look at "Class A" properties—the brand-new, fancy buildings with gymnasiums and rooftop pickles—they are actually doing okay. Companies are downsizing their total footprint but upgrading the quality to trick employees into coming back to the office. It’s the "Class B" and "Class C" buildings—the boring 1980s boxes—that are getting absolutely slaughtered.
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Retail is actually holding up better than people expected. After the "retail apocalypse" of 2017, the weak players were already weeded out. Now, we see "medtail"—doctors and dentists moving into malls—and high-performing grocery-anchored centers doing just fine. Industrial real estate, like warehouses for Amazon, is also cooling off from its pandemic highs but isn't crashing. The commercial real estate crash is, specifically, an office and urban core crisis.
San Francisco: The Warning Label
San Francisco is the "canary in the coal mine." Vacancy rates there hit over 36% recently. For context, 10% used to be considered "concerning." When a city loses that many workers, the ecosystem dies. The coffee shop on the corner closes. The dry cleaner goes out of business. The city loses tax revenue, which means they cut services, which makes the city less attractive, which leads to more vacancies. It’s a feedback loop that’s hard to break.
Can We Just Turn Them Into Apartments?
You’ve probably heard this a million times. "Just convert the offices to housing!"
It’s harder than it sounds.
Most office buildings are giant squares. Apartments need windows. To turn a deep office floor plate into apartments, you’d have to hollow out the middle of the building to create a courtyard, or you’d end up with "bowling alley" apartments that are 60 feet long and 10 feet wide with one window at the end. Then there’s the plumbing. Office buildings have one big bathroom core in the middle. Apartments need individual plumbing for every unit. Usually, it’s cheaper to tear the whole thing down and start over. That takes years.
What Happens Next?
The "wall of maturities" is the phrase to remember for 2025 and 2026. Roughly $1.5 trillion in commercial mortgages are coming due. Owners have to either pay them off, sell, or refinance at much higher rates. Many will choose "jingle mail"—basically just mailing the keys back to the bank and saying "it's your problem now."
We will see more distressed asset funds popping up. Savvy investors with "dry powder" (cash) are waiting on the sidelines to buy these buildings for pennies on the dollar. It’s a massive transfer of wealth.
Actionable Insights for the Non-Billionaire
You might think this doesn't affect you if you don't own a skyscraper. You're wrong. If you have a 401k or a pension, you likely have exposure to Real Estate Investment Trusts (REITs).
- Audit your REIT exposure. Not all REITs are equal. Data center REITs and Cell Tower REITs are booming. Office REITs are toxic right now. Check your tickers.
- Watch your local bank. If you have deposits above the FDIC limit in a regional bank with heavy commercial exposure, it might be time to diversify where you keep your cash.
- Identify the opportunities. If you’re a small business owner, the "flight to quality" means you might be able to snag a lease in a much nicer building for the price you're currently paying for a dump. Landlords are getting desperate and offering "tenant improvement" dollars like crazy.
- Don't wait for a bottom. In real estate, the bottom is only visible in the rearview mirror. If you’re looking to buy distressed commercial debt or property, the "blood in the streets" phase is starting now.
The world isn't ending, but the era of the boring, suburban office park and the mid-tier downtown high-rise is. We are watching the geography of work being rewritten in real-time. It’s messy, it’s expensive, and for some investors, it’s going to be terminal. For everyone else, it’s a chance to see our cities become something entirely new.