More Office Bldg Owners Default On Their Loans
USA – Banks are preparing for more distressed office landlords, as defaults by commercial property owners rise, reported The Wall Street Journal on Tuesday afternoon (21 February, SGT).
In a bourse filing earlier this month, Brookfield Asset Management announced that it had defaulted on loans worth US$750 million that were secured by two office buildings in Los Angeles.
Sources also revealed that property company RXR is in talks with creditors to restructure debt collateralized by a 34-storey office tower in Manhattan. Among the options under consideration is handing over the asset to the lenders.
Moreover, Trepp Inc’s Senior Managing Director Manus Clancy disclosed that 5 to 10 office buildings each month join the list of commercial properties at risk of defaulting due to weak office occupancy, expiring office leases, or maturing loans that would have to be refinanced at a higher interest rate.
Until now, most office landlords have managed to stay current on their mortgages as office lease terms usually run for 10 years or more and banks have been willing to extend expiring mortgages.
While the delinquency rate for loans that were used in commercial mortgage backed securities (CMBS) remains low, it’s inching higher. In January, it edged up by .25 percentage points to 1.83 percent – the highest gain since December 2021, based on Trepp data.
In addition, lenders are bracing for more troubled loans. Wells Fargo announced last month that its nonaccrual loans backed by office properties rose by 8 percent quarter-on-quarter to US$186 million in Q4 2022. Notably, nonaccrual loans are debt in which the bank is not expecting full payment of interest and principal.
“Commercial real estate markets are currently in a recession,” commented Owen Thomas, CEO of Boston Properties, one of the biggest office landlords in the US, on an earnings call earlier this month.
The rising number of distressed office assets reflect that the strong return to the office hoped by office landlords and banks is not yet happening, with the number of staff members returning to their workplace rate plateauing at about 50 percent of the level seen before the pandemic.