A sinking commercial real estate market could soon drag down America’s banks and economy. That’s the disturbing indication from a new report revealing just how massively overvalued office buildings have become.

The study by Trepp found that a staggering 44% of bank office loans are now “underwater” with the building’s worth less than loan amounts owed. Making matters exponentially worse, office vacancy rates have hit all-time highs of nearly 20% as remote work persists and companies downsize footprints.

The divergence of building values and rents from loan payments stems from a real estate bubble inflated over the past decade. Investors and lenders alike bought into the notion that office demand would continue growing steadily for the foreseeable future. The COVID-driven mass shift to remote work shattered that premise.

With leasing activity at just one-third of pre-pandemic levels, there is no scenario where office demand ever returns to past highs. Instead, a painful market correction is inevitable. As delinquencies rise, banks may face spiraling write-downs and be forced to offload properties at huge losses. The fallout could parallel that from the savings and loan crisis that kicked off the 1990 recession.

In sum, the Trepp data highlights an office real estate bubble ready to pop. Lenders and investors were too slow adjusting risk models and still remain in denial. But economic reality cannot be ignored forever. We are likely on the cusp of a downward spiral where struggling buildings weigh on bank balance sheets, causing tightening credit conditions, business closures, and broader economic pain.