Office Sector Faces Surging Loan Defaults Amid Market Challenges

Real Estate

Maturing office loans are concentrated in primary markets. Image by Sean Pavone/iStockphoto

The office sector is poised for a surge in loan defaults as demand for office space declines, expenses rise and property values fall. CommercialEdge’s loan data analysis reveals that nearly $150 billion in office loans are set to mature by the end of the next year, and over $300 billion by the end of 2026.

Maturing loans are concentrated in primary markets, urban submarkets and Class A properties, with eight major markets—including Manhattan and Los Angeles—accounting for half of the total maturing loan volume through 2024.

While office space demand has partially rebounded, utilization remains at 50-60 percent of pre-pandemic levels, leading to increased tenant leverage in lease negotiations and a rise in delinquencies. Trepp reports a significant increase in office CMBS loan delinquencies, reaching 6.1 percent in November 2023 from 1.7 percent in November 2022. The future trajectory depends on interest rates, bank strategies and the ongoing low investor demand for offices.


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In November, the office-using sector saw an increase of 5,000 jobs, marking a 40 basis points rise. However, the momentum observed in the previous month appears to have waned, even in the most dynamic markets. Twin Cities, Los Angeles, the Bay Area, New York City and Denver encountered notable setbacks in office employment during this period.

The national office vacancy rate continued to go upward, clocking in at 18.2 percent at the end of November, a 190-basis-point increase from the same period last year. According to CommercialEdge, vacancy recorded the highest increases in markets with a large share of remote workers such as San Francisco (510 basis points), Seattle (430 basis points year-over-year), the Bay Area (410 basis points) and Twin Cities (340 basis points).

National full-service equivalent listing rates averaged $37.73 per square foot in November, down 90 basis points year-over-year and 4 cents less than in the previous month. The highest average in-place rents were recorded in gateway markets such as Manhattan ($70.78 per square foot), San Francisco ($62.18 per square foot), Boston ($45.31 per square foot) or Los Angeles ($41.60 per square foot). Other markets included those with amenitized or new inventory, such as the Bay Area ($54.41 per square foot), Miami ($46.52 per square foot), San Diego ($42.20 per square foot) and Austin ($41.36 per square foot).

Construction starts see sharp decline in 2023

The under-construction pipeline featured 99.6 million square feet of new office space underway at the end of November, accounting for 1.5 percent of total stock, CommercialEdge shows. Office development in 2023 has declined significantly, with only 36.5 million square feet started by the end of November, marking a more than 40 percent decrease compared to the same period in 2021 and 2022. While life science and Sun Belt markets show more activity, there is a general easing of development across segments. Dallas has emerged as the leading city in office construction starts, with over 3 million square feet of square feet.

As of November, Boston had 13.5 million square feet of office space underway, accounting for 5.5 percent of total stock. San Diego had 5.1 million square feet of office space underway, or 5.4 percent of stock. Austin had 5.0 million square feet of office space under construction (5.4 percent), while Nashville’s pipeline featured 3.1 million square feet, or 5.4 percent of total stock.

Total office investment year-to-date in November totaled $30.1 billion. At the same time, the average sale price for a property stood at $193 per square foot. Average sale prices have declined in most markets, but San Diego has remained stable, showing a slight increase from $410 to $412 per square foot in 2023.

Read the full CommercialEdge office report.

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