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Office Landlords Are Defaulting

Though pandemic restrictions have been lifted for a while now, remote and hybrid work arrangements are still leaving downtown office buildings underfilled. As a consequence, the number of office landlords defaulting on their loans is rising, reports The Wall Street Journal (subscription).  

The data: “Five to 10 office towers each month join the list of properties at risk of defaulting because of low occupancy, expiring leases or maturing debt that would have to be refinanced at a higher rate, according to Manus Clancy, senior managing director with data firm Trepp Inc.”

  • “The delinquency rate for office loans that back commercial-mortgage-backed securities remains low, but it is heading higher. The rate last month rose by a quarter of a percentage point to 1.83%, its largest increase since December 2021, according to Trepp.”

Not in the office: It seems likely that a full-scale return to offices won’t occur. According to the Journal, the number of workers heading into offices has stabilized at about half the pre-pandemic number.

  • Here’s an eyebrow-raising data point: “In a soon-to-be-released report, commercial real-estate services firm Cushman & Wakefield PLC is projecting that the U.S. will end the decade with a record 1.1 billion square feet of vacant space, compared with 688 million square feet in 2019.”

The big picture: The impact of these foreclosures may make its mark on the wider economy, as office buildings backed $1.2 trillion in debt at the end of Q3 2022, according to Trepp.

The last word: “‘Commercial real-estate markets are currently in a recession,’ said Owen Thomas, chief executive of Boston Properties Inc., one of the country’s largest office building owners, on an earnings call earlier this month.”

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