The commercial real estate market is bracing for a potential collapse, with a confluence of factors creating the “great commercial real estate panic of 2024.”

The primary culprit is the lingering impact of the COVID-19 pandemic. Remote and hybrid work models have hollowed out downtown office spaces across the country, leaving many buildings vacant. The office vacancy rate in the first quarter of 2024 hit a record high of 19.8%, up from 19.6% in the previous quarter.

This erosion in demand comes as a staggering $929 billion, or 20%, of the $4.7 trillion balance of commercial mortgages held by lenders and investors is set to mature in 2024 – a 28% increase from 2023. Meanwhile, the Federal Reserve’s aggressive interest rate hikes have made it increasingly difficult for property owners to refinance these distressed loans.

Adding to the pain, commercial real estate values have plummeted, with prices declining 5.3% in the final quarter of 2023 compared to the same period in 2022. In major markets like Washington D.C., New York, and Los Angeles, prices per square foot have dropped by as much as $151.

This trifecta of empty buildings, tight credit, and high interest rates has sparked fears of a domino effect in the banking sector, particularly among small and regional lenders that hold a large share of commercial real estate debt. Treasury Secretary Janet Yellen acknowledged the “stress and losses” facing the industry, though she expressed hope it would not become a systemic risk.

While federal and local officials are pushing plans to convert empty office space into housing, the logistics and timelines involved make this a complex solution. In the meantime, property owners are facing the unenviable choice of selling at steep discounts or risking default.

Industry experts warn that without a quick reversal in interest rates, the commercial real estate market could see $700 billion to $1 trillion in defaults over the next two years. The fallout has the potential to ripple through the broader economy, underscoring the gravity of the situation facing this critical sector.