U.S. Office Buildings Threatened by Defaults Reaches More Than $38B

Continued weak office space demand and high interest rates with no promise of a nearing rate reduction due to persistent high inflation has pushed the value of U.S. office buildings threatened by defaults, foreclosures, or other forms of distress to more than $38 billion according to reported data from MSCI. The dollar volume is the highest amount since the 4th quarter of 2012 in the aftermath of the 2008-2009 financial crisis. In contrast to 2021 when more than 90% of office loans that were converted to commercial mortgage-backed securities (CMBS) were paid off at maturity, in 2023, the percentage lowered sharply to 35% — the worst payoff rate in the history of Moody’s data, which goes back to 2007. Interest rates have become particularly problematic since most of the mortgages nearing maturity were made when interest rates more much lower; and although many landlords would be able to pay the higher rate in a normal office market, the current high level of office vacancy has significantly impacted properties’ cash flow. Moody’s projects that 73% of the $18 billion of CMBS loans maturing in the next 12 months will be difficult to refinance because of property’s income, debt levels, vacancy, and approaching lease expirations; and due to high exposure to commercial property, regional banks have been reporting high net charge-offs in recent weeks. It has been further noted that a new breed of investors is stepping in to take advantage of the eye-catching discounts on office building prices, creating a shift in who owns property in the country’s business districts as major institutional investors such as Blackstone and Brookfield Asset Management hand high-profile properties back to lenders.

Source:    https://www.wsj.com/real-estate/commercial/office-buildings-past-due-loans-record-51a373a6