Commercial real estate values are set to crater as much as 40% by 2025 in these 6 cities

San Francisco will lead the plunge in commercial real estate values, Capital Economics predicted.

• Commercial real estate values will crater as much as 40% in some cities, Capital Economics said.
• The research firm saw significant value declines across six major markets.
• That's largely due to poor demand for office buildings as work-from-home remains popular.

Commercial real estate is in for hefty price declines across six top US cities, according to a recent report from Capital Economics.

The research firm highlighted cities it dubbed "major markets": San Francisco, Chicago, New York City, Los Angeles, Boston, and Washington, DC. 

San Francisco is expected to suffer the largest decline, with commercial property values in the city plummeting 40%-45% from 2023-2025.

Chicago and New York will see declines of 30%-35%, while LA and Washington will see 25%-30% drops. Boston is expected to see values slipping around 25%.

Other cities in its "Western metros" category will suffer comparable valuation declines, such as Seattle, Portland and Denver, while values in Southern cities like Miami, Dallas and Atlanta are set to fall 20% or less.

That's largely fueled by the dwindling demand for office buildings as the work-from-home trends persist and the labor market weakens.

Office-based jobs growth was poor in all six "major markets" this year except for Boston, and growth will likely "limp" to rates below 1% over the next five years, the firm estimated.

Office demand has also been exacerbated by issues like high rents, high commuting and housing costs, and the high proportion of tech jobs located in metropolitan cities, which means office demand in those areas has been impacted by the layoffs sweeping the tech sector.

Office vacancies across all six top cities are expected to climb to nearly 19% by the end of 2025, the firm said.

Other experts have been warning of trouble for the commercial real estate sector amid struggling post-pandemic demand for office properties and the anticipated crunch in credit conditions, which could spark more trouble for commercial real estate assets.

Morgan Stanley sees a 40% crash in commercial real estate prices, meaning the sector would suffer an even more severe downturn than it did in 2008.