Here's a quick update on the world's most well-telegraphed credit market problem — office loans.

The big picture: The WFH wars are over — hybrid work won. And the departure of roughly a quarter of white-collar workers from offices will continue rattling through the $20 trillion private commercial real estate market for the foreseeable future, Matt writes.

State of play: Delinquencies on commercial mortgages backed by U.S. office properties hit 5.8% in December, the highest since late 2017, according to S&P Global.

• "Given the lasting adoption of work-from-home behavior, high interest rates, and diminished credit availability, office property values across the U.S. have declined," wrote Goldman Sachs analysts in a recent note.

Drip-by-drip, we're getting confirmation of this simple reality.

• For example: The mortgage on a 26-floor midtown Manhattan office tower owned by private equity giant Blackstone is being marketed to potential buyers at a 50% discount to its face value, Bloomberg reported.
• And in earnings reports over the last week, large banks have disclosed losses linked to the sector: Bank of America charged off $100 million tied to eight office buildings, while Wells Fargo notched $377 million in charge-offs on commercial real estate loans, according to the Wall Street Journal.

Threat level: TBD.

• For those in the business of building, owning or lending to office buildings, the downturn is a concern. But it may only matter more broadly — to the economy and the markets — if it starts to seriously unsettle the banking system.
• That's where the uptick in delinquencies could become a problem.

Flashback: Commercial real estate busts have been at the heart of major financial upsets in the past, such as the S&L crisis of the 1980s and early 1990s.

Zoom in: In its most recent quarterly report on the state of the banking system — which captured conditions in Q3 2023 — the FDIC spotlighted a 36% jump in the volume of non-current commercial real estate loans. (Non-current loans are either 90 days past due or not expected to be repaid. See the chart below.)

• The rise has been driven primarily by deterioration in office loans, the agency said.

The bottom line: While the uptick in commercial real estate loans going bad isn't great, it's not even close to the levels of distress during and after the financial crisis of 2008.

Yes, but: We're nowhere near the end of the story.

• "It's a long movie," Wells Fargo CFO Michael Santomassimo told analysts asking about the outlook on commercial real estate after the bank reported earnings last week.
• "We're past the opening credits, but we're still in the beginning of the movie. And so, it's going to take some time for this to play out."

💰 Congress approves short-term funding to avert a government shutdown. (Bloomberg)

🤖 EU commission intends to block Amazon's acquisition of iRobot. (WSJ)

📉 Rout in Chinese stocks accelerates as foreign investors sell. (FT)

Prices for Spirit Airlines' bonds have plunged since a court blocked a proposed merger with JetBlue earlier this week, Axios' Kate Marino writes.

Why it matters: The sharp fall signals that bond investors think Spirit won't be able to repay all its debt without a rescue from a suitor like JetBlue.

State of play: The WSJ reported yesterday that Spirit is now exploring options for restructuring its balance sheet.

• How it works: Debt restructurings can take the form of distressed exchanges — that's when debtholders agree to a deal in which they won't get paid back in full, but they get something in return, like a higher-priority spot in the company's debt structure.
• The other option is shedding debt by filing for bankruptcy.
• (PSA: Companies often continue to operate even when forced to use the bankruptcy code to restructure.)

By the numbers: Spirit has a total of $3.35 billion in debt, according to its latest quarterly filing.

• Its $500 million bonds due in 2026 plunged to trade at 31 cents on the dollar — less than a third of what they'd be worth if the company paid them back in full.

The intrigue: If Spirit does ultimately need to file for bankruptcy — as some Wall Street analysts suggest it might — its bondholders would be in line to be repaid before stockholders get anything.

• But, but, but: The market is valuing the stock at $622 million, even as bondholders price in big losses.

Last year the typical justification for tech company layoffs was the macroeconomic climate, Axios' Megan Morrone writes.

• This year there's a new story in town: a renewed focus on AI.

Why it matters: The new trend in tech company layoffs could be less about replacing workers with AI, and more about replacing workers with a smaller number of workers who are more skilled in AI, for now.

What's happening: Last week and again this week, Google has laid off hundreds of workers to focus more on AI. Some of those workers were on advertising or hardware teams, but others were working on one of Google's original AI tools, Google Assistant.

• Google spokesperson Courtenay Mencini told Axios the changes are about efficiency and focusing on the company's biggest priorities.
• Salesforce, Duolingo, and even AI hardware startup Humane have also announced layoffs or hiring freezes as a part of an effort to focus on AI.

By the numbers: According to Layoffs.fyi, 58 tech companies have laid off 7,785 employees already in Q1 2024.

What they're saying: Muddu Sudhakar, co-founder and CEO of generative AI solutions company Aisera, told Axios that he's seeing a "a huge displacement of white-collar workers" in basic software developer jobs as well as database administrator roles.

• Large language models pose real risks for software engineering jobs, says Mark Muro, a senior fellow at Brookings Metro.
• He points to forthcoming work from Brookings Metro showing that "'computer' jobs — including software development — face generative AI exposure scores of 90% and more, meaning that 90% of their work tasks could be done in half the time using ChatGPT."

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