On 13 January 2020, Thailand reported the first case of Covid-19 outside China. By the end of March, the virus had so spread that most of the world was under some form of lockdown. The International Labour Organisation estimated 2.7 billion workers, 81 per cent of the world’s workforce, faced restrictions. In advanced countries, a large minority could work from home. For the US, the percentage of remote workers was 30 per cent. For Australia, the level was 40 per cent.

Though of scant regard then, remote working shaped as part of a two-pronged hit to commercial property, which forms a significant part of retirement fortunes. The biggest jolt was that remote working battered demand for office space. The other blow was economic. The pandemic policy responses stoked inflation. That led to higher interest rates which hurt debt-laced commercial property, which includes health, industrial, office, residential and retail sites.

The extent of the pandemic’s battering was always going to take time to determine. Unknown was how quickly people would return to offices and to what extent. Other delaying factors were that businesses take  leases for years on space and property is only traded and valued intermittently.

The consequences for commercial real estate are arriving now and they are ugly. Office values are plunging worldwide. McKinsey reckons remote work could wipe US$800 billion from office-block values in key global hubs in the next seven years. The consultant estimates demand for office space will be 13 per cent lower in 2030 compared with 2019.

That might be an optimistic view of office demand. US property-security firm Kastle, which tracks the use of work passes, placed US workplace capacity at 50.2 per cent in mid-July. Cellphone tracking by Placer.ai found office visits across the US in June hovered around 60 per cent of pre-pandemic times. Little wonder businesses everywhere are reducing space.

Shrinking demand (gauged by rising vacancy rates) is lowering rents just as higher interest rates are bloating owner costs. In the US, where vacancy rates average 20 per cent compared with 12 per cent pre-pandemic, office values have dived an estimated 35 per cent and the decline could extend to 40 per cent. Some property trusts have defaulted. Europe is likewise struggling. Financial centres in Frankfurt, London and Paris are losing tenants.

A similar pattern is evident in Australia. Investment bank Barrenjoey warns commercial property values here could plunge 20 per cent. Sydney’s 44 Market Street, for instance, sold in June for A$393 million, a 17 per cent drop on a valuation six months earlier.

Past commercial property crises, like the one in the 1990s, were usually sparked by a recession and shook banks. Today’s is different in that remote work is the bigger trigger and the crunch ensnares the superannuation industry, in Australia anyway. In the US, it’s mid-sized banks facing a ‘doom loop’ from the property slump.

Many Australian superannuation vehicles hold listed and unlisted property investments. Property is supposed to provide steady income streams via long-term rental leases, some capital growth and, as a bond proxy, offer diversification away from riskier shares.

In recent months, super giant Australian Retirement Trust reportedly reduced its office values by 10 to 15 per cent. Construction industry super fund Cbus reportedly slashed real estate valuations by up to 10 per cent. Cbus’s default Growth (MySuper) option has 12 per cent in property. (Enquiries to both went unanswered.) As for listed developers and fund managers, Dexus lopped 6 per cent from its property values, a $1 billion hit, while Centuria Capital Group opted for a 4.4 per cent cut. Charter Hall Group made a 2.8 per cent trim for a $1.9 billion loss.

Despite these reductions, the suspicion is that property is still overvalued. A lack of sales as owners baulk at what they dismiss as low offers means other owners can avoid devaluing their assets.

Regulators are airing concerns about overinflated valuations, a blight that extends to all private equity assets. The warnings sting for industry funds because many own private investments and have revalued them to boost returns. Hostplus’s Balanced (MySuper) default option, for instance, reportedly held 51 per cent in unlisted assets on 31 December. Private equity relies on debt and is thus vulnerable to higher interest rates. (Hostplus too failed to respond.)

Regulators must pounce on excessive valuations because it means new investors are being ripped off. Prodded by warnings that private assets pose valuation and illiquidity risks, the Australian Prudential Regulatory Authority in July said it expects unlisted assets to be valued quarterly. Super funds can do this annually now.

Property fund managers, who regularly revalue their private assets in rising markets, might be able to muddy falling valuations. What they can’t hide is an inability to meet redemptions.

The shock of the crisis so far occurred in November when US private equity giant Blackstone limited withdrawals from its US$70 billion flagship real estate fund to avoid property sales to meet redemptions. Some UK managers have done likewise.

This embarrassment for Australian property funds arrived in July when Charter Hall limited redemptions from a $2.45 billion office-based fund to just 25 per cent. The same month Centuria suspended distributions on a one-building fund and limited redemptions on two other funds. Such clamps remind of the collapse of unlisted property trusts in the 1990s.

The office crisis could worsen when debt needs renewing – it’s estimated US$1.5 trillion in US commercial property debt expires over the next three years. The questions to be answered are who might refinance this lending and at what rates.

Many worry that commercial property is in crisis when economic conditions are stable. A recession would be devastating. If that were to happen, billions more super dollars would be destroyed, many industry funds might be exposed as recklessly run, controversies over valuations would intensify, and the next global banking crisis might erupt.

Now, many towers are holding their worth and office values usually only form a minority of commercial property’s total worth (just 16 per cent in the US). But enough office blocks are dropping in price and offices are property’s bellwether. Some tout converting office blocks to residential to relieve the crisis. But it’s usually uneconomical to refit buildings for families.

Forget any quick solution to the global office crisis. Remote workers might find the no-commute treat could cost more than they imagine.