Office Landlord Debts and Defaults are on the Rise

It’s appearing more and more certain that the work from home revolution has indefinitely stunted the commercial real estate industry.

But all the speculation and rumors of the last few months can’t match hard action like a major landlord defaulting on almost $1 Billion of loans in a metropolitan hub. Now, commercial real estate professionals across the country are worried (and rightfully so) that rising CRE loans have started a nasty runaway cycle that can’t be stopped.?More landlord defaults are likely coming and huge names in real estate are bracing for impact?if they haven’t already done so.

So read on to learn about the latest issue spurred from the recession, rising interest rates, and overall weak demand. Landlord defaults are on the rise,?are you ready?

Reeling from the Office Apocalypse

At what point does everyone agree that the hybrid work phenomenon is not a fad, but a systematic restructuring of industry?

Unfortunately for commercial landlords,?that reckoning may be finally here. While many hoped that a fully in-person work schedule would gradually return, office occupancy rates are still stalled.?Three years following the initial closures, offices visits have plateaued at around 50% what they were pre-pandemic.?And unfortunately, as the country just hit a new high for office vacancy rates (18.7%), it doesn’t look hopeful on the horizon. The wasted space dilemma is projected to worsen in the next decade. These tectonic plate shifts are irreversible.?

“There will be more than 1.1B SF of vacant office space in the U.S. by the end of the decade.”

-BisNow

As if this wasn’t bad enough for commercial landlords, they’re also feeling the heat from?rising interest rates?and inflation. All said and done, for many property owners, their commercial buildings have transformed into potential liabilities.?And shocking as it may seem, many big players are not waiting around for the other shoe to drop.

Commercial Landlord Debts and Defaults are Rising

With so much doom and gloom predicted to come for landlords, it’s not a surprise that the time has come for many to hand back the keys. But what is surprising in this situation is the sheer breadth of those wanting out.

According to Business Insider, “Brookfield Asset Management, which has more than $725 billion in assets under management as of last year,?defaulted on over $784 million in debt that underpins two Los Angeles office towers this month.”

But they’re not the only ones defaulting on their loans, and with?24% of commercial real estate loans coming due in the next year (a majority comprised of office loans) the issue is projected to become far more commonplace.?This is especially so, since?rising interest rates and inflation have significantly driven up the cost of debt for commercial landlords.

“Debt costs are up 40% to 50% for some owners whose loans are maturing, causing a seismic shift to underwriting and turning some buildings with a healthy cash flow into risks.”

-Stephen Buschbom, Trepp's director of research

What’s so significant about this is the?sheer sum of money entangled in these loans.?For instance, while 24% (of loans upcoming) may not initially seem to have severe ramifications, in New York City alone, there is?$16 billion of loans set to mature this year.?According to Metro Manhattan, this represents a?30% year-over-year increase.

So, major landlords defaulting on their loans has severe implications on the greater economy. And the cost of such loans is rising.?

Weak Investor Interest in CRE?

Clearly, commercial real estate investors are also sitting on the edge of their seats, antsy for an out while they can still take it. Because weak demand and an overall cooling market has investors looking for an escape hatch-?and no company is safe,?no matter its breadth.??

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