There could be a wave of more than $1T of losses on the horizon for the office market, according to Barry Sternlicht.

Calling the sector the "one asset class that never recovered" from the pandemic, the Starwood Capital CEO said the office market is in an "existential crisis" because U.S. employees are working from home, Bloomberg reported.

Sternlicht predicted values have dropped from $3T to $1.8T since the pandemic began.

"There's $1.2T of losses spread somewhere, and nobody knows exactly where it all is," Sternlicht said Tuesday at the iConnections Global Alts conference in Miami Beach, according to Bloomberg.

Office values have been declining since the Federal Reserve began raising interest rates at a rapid pace, and owners are finding it difficult to refinance loans as a result.

"We're in the business of getting loans," Sternlicht said, adding that the Fed has "left a serious mess in capital markets."

Regional banks had been a major source of CRE lending in past years but have retreated from the market. The banks "don’t show up," he said.

"They’re not even playing. So the alternatives are the debt funds, which are having a field day," Sternlicht said.

Sternlicht has been vehement about his office concerns, saying in July that the industry is "in a Category 5 hurricane" and blasting the Fed for "crushing" CRE after Starwood's net income dropped 75% year-over-year in the third quarter.

It is no secret that the office market has been struggling since the onset of the pandemic. Nearly four years later, lenders have lost faith in a market recovery, owners are struggling to refinance their loans, and buildings are trading for significantly less than the value of their loan or short selling.

About 44% of office properties are underwater on their loans, according to the National Bureau of Economic Research. Values for Class-A offices have fallen 35%, and Class-B buildings are down 60% since the Federal Reserve started raising interest rates in March 2022, according to Green Street.

There have been some positive signs for the office market of late. Demand for office space has been going up year-over-year for the last six months, according to the VTS Office Demand Index, which tracks unique new tenant requirements of office properties in prime U.S. markets. The index bottomed out at 44 in December 2022, but it now stands at 55, a 19.6% increase year-over-year and a 7.8% quarter-over-quarter bump.

This could be a result of return-to-office mandates finally having an impact on office usage after years of failing to move the needle. UPS and Boeing are among the most recent large companies to implement strict full-time return-to-office policies, threatening write-ups or termination if they aren’t followed.

IBM, a remote work pioneer, joined the roster Wednesday when it told managers working remotely that if they didn't relocate near an office, they would have to leave the company. IBM expects to reduce its workforce by 3,900 people, Chief Financial Officer James Kavanaugh said, according to Bloomberg.

While Kastle Systems' Back to Work Barometer spent most of 2023 right around the 50% attendance rate, it peaked earlier this month with a 57.5% national average of employees badging into the office compared to pre-pandemic, better than 2023's year-over-year peak around the same time.