Commercial real estate may not recover until 2040, with low-occupancy, high-cost cities like New York and San Francisco hit hardest

Here’s the problem: office occupancy rates today in many cities are at about 50% of their pre-pandemic levels. And interest rates are up substantially—the yield on the ten-year Treasury, as a benchmark, has jumped from around 1% to 4%. That means the capital cost of acquiring real estate has gone up sharply, while demand has gone down.

Because real estate is a long-term game, the effects aren’t immediate. And ultimately, the size of those effects will depend on whether 1) occupancy rates go back up, and 2) interest rates come back down. I wouldn’t bet on either happening quickly. As a result, the pressure on office real estate is certain to grow. Fortune spoke yesterday with Kiran Raichura of Capital Economics, who says his organization is predicting a 35% decline in office values by 2025. And because the causes are structural rather than cyclical, the market could take a long time to recover. How long? Perhaps not until 2040, he says.

Not all cities will be hit equally. Those with the lowest occupancy rates and highest costs—we’re looking at you, New York and San Francisco—will be affected most, while sunbelt cities with higher occupancy rates, lower costs, and a healthy inflow of new workers, will be affected less.

You can read Raichura’s analysis here. And then think about what the spillover effects of such a prolonged office slump might be. One thing to watch out for: a second wave of bank problems.

But the prospect of a crashing real estate market isn’t slowing the stock bulls. Long-time prognosticator Ed Yardeni believes the bull market in stocks will continue through the end of 2024, with the S&P 500 rising 6% to 20% further. 

More news below.

Alan Murray
@alansmurray
alan.murray@fortune.com

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This edition of CEO Daily was curated by Nicholas Gordon.