The office building credit crunch could hit the US economy as a whole, says former Deutsche Bank lender

Toby Cobb has been the hammer of the commercial real estate market for decades, in charge of who gets credit in boom years and in charge when things go bust.

Cobb was co-head of Deutsche Bank’s US commercial real estate practice in the run-up to the global financial crisis of 2008. He went on to co-manage fellow Justin Kennedy with LNR Property, one of the nation’s largest training firms for crooked real estate deals.

He now believes office problems could spill over into other areas of commercial real estate and that the US could be headed for a major economic downturn as banks pull back from lending as they end up reeling from their office exposure.

“Every single crisis in my life has been overwritten by real estate,” said Cobb, co-founder and managing partner of 3650 REIT, a lender and debt servicer he co-founded in 2018.

“In each case, there was a fundamental mismatch between supply and demand. We had way too much square footage and not enough people to accommodate them,” Cobb said. “Overbuilding has historically been the culprit.”

This time, Cobb again sees an imbalance between supply and demand, but it cannot be attributed to overdevelopment, particularly as mortgage lending has been “relatively responsible” in the struggling office sector.

Instead, he sees the problem as defining which office buildings in which cities have enough appeal to compete with living rooms, improvised home offices, and nonexistent commutes.

“I’m kind of a boss who works from the office,” Cobb said, speaking of his team of about 70 employees in Miami, New York, Los Angeles and several other major U.S. cities, with some flexibility in the number of employees reports to the office. “I don’t know how much space I need. And I insist that if you want to learn and grow, you have to be in the office.”

offices created

Cobb, like other industry veterans, has braced himself for the fallout from commercial real estate after a decade of low interest rates, particularly the wrecking ball of remote work in the $3.2 trillion US office real estate market.

Cobb earned a reputation for being in the right place at the right time, whether at Deutsche Bank when commercial real estate was booming or at LNR when it crashed to earth. He attributes his success to his ability to “define the line between winners and losers and only lend to winners.”

After borrowing from Deutsche Bank, he moved to LNR to work on distressed properties when borrowers defaulted after 2008. As credit recovered, Cobb helped plan the sale of LNR to Barry Sternlicht’s Starwood Property Trust for about $1 billion.

He is now trying to solve a new riddle: Should home office be counted as part of the permanent office landscape? “We’ve never seen it before,” said Cobb. “Does the superstructure actually come from private households?”

As with the US mall spate that has plagued the retail sector for years, Cobb expects home offices to exacerbate the office problem. “I don’t think people talk about it,” he said.

Jones Lang LaSalle estimated that in the first quarter of 2023, 20% of the approximately 4.8 billion square feet of U.S. office space was vacant and another 90 million square feet were under construction or renovation.

A broader count, including home-based jobs, could account for America’s estimated 142 million housing units.

While 3650 REIT remains cautious on office buildings, it has been selective in lending in the sector. “There are great office buildings that can still be built in really scary markets,” Cobb said.

Most of the US office stock is also heavily biased toward older buildings, built in the 1980s and earlier, which “have reached the end of their useful life and are very expensive for tenants,” Cobb said.

“There are just a few buildings now that no one wants.”

Related: Office real estate troubles could be tip of iceberg if lending freezes as $1 trillion bill falls due

also read: A much-predicted US recession still hasn’t materialized, thanks to consumers