Demolish Office Buildings As Demand Isn’t Returning

• Office buildings should be torn down as demand isn’t going to bounce back, Kyle Bass said.
• Converting office space to apartments isn’t practical either, he told Bloomberg. 
• “It’s one asset class that just has to get redone, and redone meaning demolished,” Bass said.

Office buildings aren’t going to see a resurgence in workers coming back, so it may be best to tear some of them down, hedge fund manager Kyle Bass said.

And despite the shortage in housing inventory, it’s not practical to keep most buildings and convert office space to apartments, he added.

“It’s one asset class that just has to get redone, and redone meaning demolished,” the founder of Hayman Capital Management said in a Bloomberg interview.

His suggestion stems from what he sees as a long-lasting shift to remote and hybrid work, which has fueled declining office demand.

In his view, those trends are particular threats to older buildings that don’t have the same types of amenities that higher-quality offices have, according to Bloomberg.

In fact, remote job openings on Indeed are three times higher than prior to COVID, while firms such as Yelp have already downsized their offices.

And Bloomberg noted that US office vacancy rates rose to 20.2% to the first quarter from 19.6% in the fourth quarter.

Bass also said multifamily-property developers can’t proceed with projects at the moment, as recent banking turmoil has caused a lending crunch that is limiting builders.

That has worsened the imbalance in the housing market, which suffers from a major shortfall in apartment supply, he added. Despite the need for multifamily units, he doesn’t see office conversions filling the gap.

“You have to jackhammer rebar and concrete. You have to re-plumb everything. And when you finish it, it just doesn’t feel right. You wouldn’t want to live there,” he told Bloomberg, citing the lack of light as an example.

But Bass, who gained fame in 2008 for shorting mortgage-backed securities, isn’t betting against office markets, saying publicly traded real estate companies have priced in these issues already.

Others on Wall Street are also bearish on commercial real estate. Prices could plummet as much as 40% from their peak in a worse crash than the 2008 financial crisis, according to Morgan Stanley Wealth Management’s chief investment officer. 

The grave outlook is based on a raft of headwinds buffeting the commercial real estate sector, including the work-from-home trend and higher interest rates making it harder for investors to refinance a mountain of looming debt.