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Post pandemic: Return to the office lags — affecting commercial real estate

STEVE INSKEEP, HOST:

For some people in this country, the return to the office has not really happened. The pandemic intensified a trend of working from home. And while many people, of course, have long since returned to the office, more than half of Americans now work from home either some days or every day, which has left many corporate towers and office spaces empty. NPR's Arezou Rezvani visited one block of downtown Los Angeles.

JAMES WALLACE SEARS: These are pandemic shoes.

AREZOU REZVANI, BYLINE: For the last few years, 80-year-old James Wallace Sears has kept a collection of what he calls pandemic shoes...

SEARS: Move to left.

REZVANI: ...Drawers full of heels, boots, loafers, all dropped off at his shoe repair shop here in downtown Los Angeles back in 2020 and long forgotten.

SEARS: You know, they were here pre-pandemic, and they've never picked them up.

REZVANI: These shoes mostly belong to lawyers, consultants and financial advisers. They used to leave their broken soles with Sears in this underground plaza before heading to work aboveground in nearby corporate towers. That all stopped when Sears shut down his shop for more than a year because of the pandemic. When he reopened, he thought he'd see them all again. But...

SEARS: But I'm very slow. But, hey, you got to start sometime if you want to try to make the comeback. So here I am, waiting and hoping the customers come back.

UNIDENTIFIED PERSON #1: Are y'all still coming in tomorrow?

REZVANI: Now, here's the thing. Aboveground on this Thursday afternoon, a lot of white-collar workers seem to be here at work.

So it's lunchtime. People have come out of these high-rise buildings. Many are having lunch with colleagues. Some are taking calls. Others are in line for coffee. And I got to say, it looks pretty busy.

But Caleb Brown, a barista at the coffee kiosk, tells me it's not always bustling like this.

CALEB BROWN: Most people are only here Tuesday through Thursday, gone Mondays and Fridays.

REZVANI: Many companies here have pumped the brakes on a full-bore return to the office. With high inflation, climbing interest rates and tightening credit from recent banking turmoil, companies are assessing whether they need all that pre-pandemic office space at all, says Kenneth Rosen, chair of the real estate research firm Rosen Consulting.

KENNETH ROSEN: The typical building has about half the number of people in it as they normally do. So companies, when their leases are up, they're cutting back their uses of space. And so leasing for office buildings has been very weak.

REZVANI: So weak that about one-fifth of office space across the country is sitting empty. That's even more than the vacancy rate following the 2008 financial crisis. Rosen worries that if companies continue to give up their leases, those who own these office spaces won't be able to collect rent and make good on their loans.

ROSEN: Because of this, I'd say the No. 1 implication is going to be defaults and foreclosures.

REZVANI: Those foreclosures could really hurt small banks that are often behind many of these loans, which is why Rosen says the office-based sector, with so much money tied up in outstanding loans, may be the next shoe to drop.

ROSEN: And it's a big one. It's about a $1.2 trillion shoe. It's going to drop.

REZVANI: That is one shoe cobbler James Wallace Sears hopes he'll never have to see. But that hope is fading day by day.

SEARS: I've had some feelers out to different customers, and they - some of them say they're not going to come back. If they come back, it maybe only three days a week. So you never know.

REZVANI: Sears says, at that rate, his little shop, which his father opened 50 years ago, might be out of business by year's end.

SEARS: Thank you.

UNIDENTIFIED PERSON #2: You're welcome. Thank you.

REZVANI: Arezou Rezvani, NPR News, downtown Los Angeles.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Arezou Rezvani is a senior editor for NPR's Morning Edition and founding editor of Up First, NPR's daily news podcast.