Defaults, Delinquencies By US Office Owners Expected To Rise Further

USA – Delinquencies by owners of office properties in the country have been increasing steadily since the middle of 2022, and there is a consensus on Wall Street that defaults and delinquencies in this asset class would rise further, according to a recent report from The Wall Street Journal (WSJ).

This is mainly due to elevated office vacancy rates across many cities. In fact, data from property consultancy CBRE showed that the average vacancy level for downtown areas in the US has hit 17.6 percent in Q4 2022 from just 13.8 percent in Q4 2020.

Despite recommendations from policy makers to transform some office spaces into apartments, many investors explained that offices are more difficult to convert than some other types of commercial properties like shopping centres.

Moreover, the higher interest rates have increased the risk of defaults as office landlords who took up floating-rate mortgages are now paying more to service their loans, reducing their cash flows. Also, office landlords who took up fixed-rate mortgages could struggle to refinance their loans at higher interest rates when it becomes due in the following years.

Nonetheless, data firm Trepp shows that most commercial property owners remain current on their loans, as only 3.09 percent were delinquent as of March 2023. While this rate is less than half the rate seen in 2020, it includes loans backed by hotels, retail spaces, and industrial properties.

In the event that the owner fails to repay their loan or can’t refinance, the office property will likely be foreclosed – taken over by a bank, which will sell the asset for less than the balance of the loan.

John Kerschner, Head of US securitized products at Janus Henderson Investors, expects around 10 to 20 percent of office buildings in the country could be foreclosed in the next few years.

Nonetheless, he believes it’s not all doom and gloom for the US office property market. “The bottom line is most people still like going to the office” at least two times per week. Office buildings will continue to exist in abundance, much as shopping malls still exist, despite widespread fears of their demise.