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One chief executive of a large office building company says the market for commercial real estate is already in recession. Is the commercial real estate market about to suffer a crash? Peter Grant reports in The Wall Street Journal:
The number of big office landlords defaulting on their loans is on the rise, fresh evidence that more developers believe that remote and hybrid work habits have permanently impaired the office market.
The giant investment manager Brookfield Asset Management recently defaulted on a total of over $750 million in debt for a pair of 52-story towers in Los Angeles, according to a February securities filing. Real-estate firm RXR is in talks with creditors to restructure debt on 61 Broadway, a 34-story tower in Manhattan’s financial district, according to people familiar with the matter. Handing over the building to the lender is among the options under consideration, these people said.
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.
Concerns over the health of the office building industry have mounted throughout the pandemic. The weak return-to-office rate has led to soaring vacancy levels in many cities. Last year’s spike in interest rates increased the cost of buying and refinancing properties and squeezed property values.
Until now, most landlords have been able to stay current on their mortgages because office leases typically run for 10 years or more and lenders have been willing to extend expiring mortgages.
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. Loans backed by office buildings in Philadelphia, Denver and Charlotte, N.C., have also either been transferred to special servicers in recent weeks or have been parts of bond issues that have been downgraded by credit-rating firms.
“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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