Towering Inferno just beginning


Now this is amusing. I somehow missed it a few months ago:

Industry super fund QSuper handed back the keys to a prime New York City midtown office tower after its investment went under water just 2½ years after valuing the asset at $US540 million ($855 million) on its books.

The decision to appoint a so-called special servicer to a $US399 million loan that backed its commercial real estate bet means QSuper faces a total loss on its position, now part of the $240 billion Australian Retirement Trust.

This is a lovely snapshot of where global office realty market is at worldwide post-COVID.

The Towering Inferno, as we affectionately call it, is already over according to the gormless AFR:

Major CBD office towers are selling at 20 per cent discounts to their peak value, the best evidence yet that the correction in Australia’s office market is nearing the bottom.


“We’re close to the bottom and these transactions will be the benchmark to set pricing for the next 12 months. We’re pretty close to where we need to be,” Jefferies analyst Sholto Maconochie said.

Are we? Or are we just starting? There’s been so few transactions in the Mexican standoff that it’s hard to tell. I don’t see widespread recognition of the problem and writedowns in profit results.

So I don’t think so. Work from Home is a structural shift. And there needs to be more pain. There is about $1tr of office refinancing this year in the US, so that will deliver some.

How do we get to the bottom then? Goldman has an answer:

The wide adoption of hybrid work caused a structural decline in office demand. The office vacancy rate increased by 4pp over the last three years to 13.5%, the highest level since 2000.


We expect the vacancy rate to rise even further in thenext 10 years to 18%, as more firms reduce their demand for office space whentheir current leases expire.

As a result, many existing buildings, especially those that are old and low-quality, may become economically nonviable as offices, raising the question of what can be done with the underutilized space

Those are similar to Aussie numbers:

The January 2024 edition of the Office Market Report, which is released twice a year, showed overall CBD vacancy increased from 12.8 to 13.5 per cent nationally. Non-CBD areas saw an increase from 17.3 to 17.9 per cent. 

How about conversion to apartments? Lol, more Goldman:

Using a discounted cash flow model, we show that current acquisition costs for struggling offices are still too high for conversion to a multifamily building to be financially feasible once we account for the high additional costs of conversion and financing.

For the top 5 metropolitan areas that are most affected by remote work, we estimate that office acquisition prices would need to fall almost 50% for conversion to be financially feasible.

This suggests that most of these offices will likely remain underutilized in the near term.

We estimate that the annual conversion rate from office to multifamily will remain low and only increase slowly to 0.7% in the next four years, delivering about 20 thousand additional multifamily units per year.

Because the conversion process is slow and costly, available office space is likely to remain excessive and many buildings are likely to remain underutilized.

As a result, we expect new office investment to remain sluggish in the next few years, resulting in a 0.2pp drag on fixed private investment growth, which will only be offset modestly by a 0.05ppboost from increasing multifamily construction.

The Towering Inferno has many years to burn, and you can expect your super fund to sneakily write down the assets over time in a manner that hides their mistakes.

With a helping hand from the iMSM.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.