Office Owners Facing Collective $38B of Distress

Office owners are holding their collective breath as tens of billions of dollars of distress put them in a bind.

More than $38 billion worth of office buildings in the country are at risk of default, foreclosure or another form of distress, the Wall Street Journal reported, as determined by data firm MSCI. That’s the most distress the sector has faced since the fourth quarter of 2012, the immediate aftermath of the financial crisis of the time.

Owners are struggling immensely to pay off their loans. Last year, only 35 percent of office loans converted into commercial mortgage-backed securities were paid off when they matured, according to Moody’s, the lowest share in 17 years of tracking. In 2021, that rate was above 90 percent.

Interest rates remain high and may not be dropping anytime soon due to persistent inflation. Meanwhile, demand for office space from tenants continues to wane, as companies embrace remote work.

The office vacancy rate is 13.8 percent, more than 4 percentage points above the vacancy rate at the end of 2019, according to CoStar. Tenants signed leases for 102 million square feet in the first quarter, 10 percent below the 2019 average.

That lack of demand — and rental income — is expected to be felt even more acutely in the coming months. In the next 12 months, $18 billion of office loans converted into maturities is set to come due, doubling the volume of the maturities that came due in 2023. 

Nearly three-quarters of those maturities will be difficult to refinance, according to Moody’s, because of income, debt levels, vacancies and lease expirations.

“The problem you have in office is, in many instances, there is no cash flow at all,” PNC chief executive Bill Demchaksaid on a recent earnings call.

Across building types, the United States witnessed nearly $86 billion of commercial distress at the end of last year, according to MSCI.

— Holden Walter-Warner