As commercial property owners struggle with sky-high vacancy rates and declining incomes, one industry expert is warning that the worst is still yet to come.

According to Fred Cordova, owner of commercial real estate advisory Corion Enterprises, 30% of office spaces in the U.S. are “basically worth nothing.” These so-called “D class” properties “just have to be torn down” to make way for developments people actually need.

“There will be a bifurcation,” he told Fortune. “The product in a good location with a good, safe environment will recover. And then you’ve got another group that will somehow hang in there and get reset in pricing.”

The rest will undergo demolition, he said.

While that may sound extreme, the reality of the office sector appears to be just as dire as Cordova claims.

For starters, the national office vacancy rate reached a record-breaking 19.6% in the fourth quarter of 2023, according to Moody’s Analytics. That’s nearly one in five office spaces sitting empty post-Covid.

In all, there are nearly 1 billion square feet of empty office space across the country—much of it lining skyscrapers of major city centers.

Cordova isnt the only expert sounding the alarm on commercial real estate, either.

American billionaire and co-founder of Starwood Capital Group Barry Sternlicht says there's an “existential crisis” facing the office market, as the one-two punch of rising vacancy rates and declining property values squeeze building owners.

Banks could be left holding the bag

If defaults rise, the problem could swell into a full-blown banking crisis, experts warn.

According to the National Bureau of Economic Research, a staggering 44% of office loans were in negative equity in 2023—meaning the current value of the properties had fallen below the loan balance.

The researchers estimated that major banks held $2.7 trillion in commercial real estate loans, which included office space and other commercial properties. These banks could be looking at a hole of between $80 billion and $160 billion if default rates reach 2008 levels.

While the study assumed hypothetical default rates, there’s nothing hypothetical about the $2.2 trillion in commercial real estate mortgages set to mature over the next four years.

If commercial real estate really is in a debt trap, we’ll probably find out soon enough.

The opportunity (and costs) of real estate conversion

Columbia Business School professor Stijn Van Nieuwerburgh thinks there’s only one way to avoid a commercial real estate disaster: convert unused office buildings into apartments.

“I think the problem is that we have too much office [space] relative to our future needs, and a lot of places have too little housing,” Van Nieuwerburgh said. “So, I think one way or another, we’re going to have to turn some of that office space into apartments.”

Converting office space into housing units has been proposed many times before. While recent trends are encouraging—RentCafe reported that 55,300 office spaces have been scheduled for conversion as of 2024—it’s only a drop in the bucket.

And it’s not enough to alleviate the housing shortage plaguing the U.S.

According to real estate analytics firm CoStar Group, fewer than 1% of U.S. commercial properties are suitable for conversion. If that wasn’t bad enough, even converting the 1% has become much more difficult due to higher construction costs and financing rates.

These factors add “a huge amount of cost to the project,” explained Steven Paynter, a principal at the architecture firm Gensler.

For conversions to start making sense financially, the government needs to provide a 20% cost subsidy, according to Cordova. While the Biden Administration has offered developers $35 billion in low-interest-rate loans, that probably isn’t enough to move the needle.

“The economic model is very challenging for conversion,” Cordova said.