Lessors of Nonresidential Buildings NAICS 531120

May 16, 2025 - “Zombie Buildings” Loom Over Office Sector Recovery

• Office property insiders suggest it may take years for the office sector to recover as so-called zombie buildings cast a long shadow over business districts across the country, according to The Wall Street Journal. Investors, often private equity firms, that own large office buildings, bought them with money borrowed from issuing bonds called commercial mortgage-backed securities. Some of those building owners have written their investments off as vacancy rates remained stubbornly high. Such buildings end up being controlled by bondholders in foreclosure. Bondholders are temporary landlords, often fighting amongst themselves in the effort to cash out. Such owners have little interest in making investments in buildings to attract tenants, and the buildings remain largely empty. Industry watchers say it may take years to reposition zombie buildings as tenants prefer newer offices in trendier areas.
• Demand for building design services declined in March compared to February, according to an April report by the American Institute of Architects (AIA). The AIA’s Architecture Billing Index (ABI) fell to 41.1 in March compared to February’s reading of 45.5. Any reading of 50 or more indicates growth in architectural billings. The score for new project inquiries fell to 47.7 in March compared to 47.8 in February, but the index for the value of new design contracts increased from 42 to 42.4. The AIA’s Chief Economist, Kermit Baker said, “Clients are increasingly cautious about starting projects due to uncertainty over future trends in interest rates and building materials costs, as well as the potential for an economic slowdown. Unfortunately, this softness in firm billings is likely to continue as indicators of future work remain weak, however, the average project backlog at firms stands at a reasonably healthy 6.5 months, offering a bit of a buffer if future project work continues to remain soft.” Nonresidential building construction activity is a demand indicator for lessors of nonresidential buildings.

• The Trump administration’s trade war threatens the recovery of the US office property market, according to The Wall Street Journal. While office leasing activity in the first quarter of 2025 was the strongest since 2019, some businesses are putting plans for new space on hold amid economic uncertainty and recession fears brought on by shifting trade policies. If a slowing economy leads to weaker hiring or layoffs, companies will likely trim their office occupancy to reduce costs. Tariffs could also trigger inflation and higher interest rates, chilling new office development activity. The gradual recovery of the office market is important for cities that have struggled since the pandemic. Offices are the core of cities’ business districts, which generate taxes, jobs, and growth and contribute to local economies by supporting small businesses, including nearby restaurants, bars, and retail.
• As distress in the commercial real estate market persists, more lenders may require property owners to take on force-placed insurance, according to Bisnow. Lenders can require force-placed insurance if a borrower’s coverage lapses, is insufficient to cover potential losses, or fails to provide proof of insurance. Force-placed typically covers the loan balance and offers protection against fire, wind, and underinsured equipment, and its cost is baked into the loan’s monthly payments. The use of force-placed insurance tends to tick upward during widespread downturns. According to commercial real estate data firm Cred iQ, at the end of 2024, more than 10% of all US commercial properties backed by commercial mortgage-backed securities (CMBS) were distressed.