Further, Cushman found that potential office users will need smaller 4.6 billion square feet of space by 2030 - thanks to the shift to hybrid work. More than a quarter of the country’s total 5.56 billion square feet of office, about 1.4 billion, will be considered obsolete. will end the decade with 1.1 billion square feet of vacant office space. A recent report by Cushman & Wakefield projected that the U.S. That included a default on the $103.4 million loan for 515 Madison Avenue.įor office owners - and especially for owners of older buildings in less-than-prime locations - the turmoil seems likely to continue for years. Moody’s latest CMBS report shows delinquencies on all conduit loans increased to 4.22 percent in January 2023 from 4.17 percent in December 2022, driven by more than $500 million in office maturity defaults for the month. It’s not an in-favor product for other types of lenders, either.” “It’s tough to refinance office in the current environment,” said Darrell Wheeler, vice president and senior credit officer at Moody’s Investor Service. Loan volumes have shrunk as lenders take a harder look at office buildings’ rental revenues and vacancy trends. “This is a re-evaluation of the asset class happening in real time, in the face of extraordinarily high carry costs.” “There was a period of time where you could refinance your way out of an issue, and that’s much more challenging with rates where they are,” said Grant Frankel, managing director at Eastdil Secured. The one-two punch of higher vacancy rates and higher interest rates means owners of struggling buildings can’t simply swap loans. In February 2023, after the Fed’s latest rate hike, that figure had risen to 4.55 percent.

Office owners were able to weather weak occupancy levels when interest rates were at historically low levels.Īs recently as March 2022, the secured overnight finance rate (SOFR), a benchmark for many commercial mortgages, was a minuscule 0.05 percent. That squeezes loan-to-value ratios and hampers owners’ ability to refinance.Īside from the sluggish return to office, the spike in interest rates is probably the biggest contributing factor in this. Not only are their properties generating less income to service debt, but their property values also are taking a hit. Unfavorable occupancy trends are a double whammy for owners. Is it a five-day week, a three-day week, a two-day week?” “Clearly the office sector is hurting post-pandemic,” Zegen said. In Manhattan, for instance, total office availability stood at 18.6 percent in the fourth quarter of 2022, a record high, according to Avison Young.

With white-collar employees continuing to work remotely, office users are rethinking their investments in space. As many workers skip the commute and set up at home or in coffee shops, demand from tenants has softened. “We, like most office owners, are addressing the unique and unprecedented challenges currently facing our asset class and customer base,” Columbia Property Trust said in a statement to CO.Ĭhallenges, indeed. And, in perhaps the most substantial sign of distress, Columbia Property Trust, which owns in San Francisco, New York and Washington, defaulted in February on $1.7 billion in debt backed by seven of its office buildings. Department of Treasury is headed to special servicing. In Washington, D.C., a $38.1 million commercial mortgage-backed securities (CMBS) loan on an office building that houses the U.S. The examples of large owners and prominent addresses in major markets abound.Īside from Brookfield’s default in Downtown Los Angeles the other dominos include RXR, which is negotiating with lenders to convert two New York City office buildings to residential. “Once one big owner did it, it gave cover for other institutions to do the same,” Josh Zegen, managing principal and co-founder of Madison Realty Capital, told Commercial Observer. That’s causing considerable trouble in the office sector - and the dam holding back default filings clearly has burst. Once viewed as a temporary measure forced by the pandemic, virtual work has outlived the era of social distancing and mask mandates. Tough times are especially pronounced in the office market, which is reeling from workers’ embrace - and employers’ acceptance - of work-from-home arrangements. In recent weeks, a number of prominent property owners have defaulted on loans, gone into special servicing, or otherwise shown signs of distress. The flood underscored the reality that, whatever the economic recovery from the pandemic, many commercial landlords are struggling to make their mortgage payments. SEE ALSO: Takeaway From Q2 Earnings: DC Office Landlords Lean Into Multifamily

Mortgage defaults rise