Office Apocalypse? Billionaire Investor Howard Marks Warns That 'Notable Defaults On Office Building Mortgages' Are 'Highly Likely To Occur.' But Here's Where Opportunities Could Arise

As a well-known hedge against inflation, real estate has received increasing investor attention in recent years. But according to billionaire investor Howard Marks, trouble could be looming in the distance for certain types of properties.

“Notable defaults on office building mortgages and other [commercial real estate] loans are highly likely to occur,” he wrote in a memo.

Marks is the co-founder of Oaktree Capital Management, one of the world’s largest investors in distressed securities. He says that “the possibility of problems stemming from loans against commercial real estate” is one of the biggest worries facing the U.S. banking sector right now.

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Risk Factors

In particular, Marks points to the rising interest rate environment, which could be a burden for borrowers. At the same time, higher rates could also put pressure on property value.

“Higher interest rates call for higher demanded capitalization rates (the ratio of a property’s net operating income to its price), which will cause most real estate prices to fall.”

In addition, Marks warns investors about the possibility of a recession, which could hurt rental rates and occupancy.

Office building landlords also have to face the work-from-home trend, which has become popular since the COVID-19 pandemic.

“While workers may spend more time in the office in the future, no one knows what occupancy levels lenders will assume in their refinancing calculations,” he said.

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The conclusion?

“We’re very likely to see mortgage defaults in the headlines,” Marks said. “And at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes and further contribute to a sense of heightened risk.”

It’s not a good picture. But in times like this, savvy investors may still find opportunities.

Be Greedy When Others Are Fearful

Like many economic phenomena, real estate and debt go through cycles. And according to industry veteran Benjamin Miller, things could be nearing a turning point.

Miller is the co-founder and CEO of real estate crowdfunding platform Fundrise. In the latest investor update, he notes that the current economic cycle is “arguably the longest in U.S. history.”

Miller also notes that the country has enjoyed a long period of near-zero interest rates and a record amount of quantitative easing. And now that the Federal Reserve has started tightening, the outlook is bleak for an economy that relies heavily on borrowing.

“We expect that sometime this summer (or early fall) the continued buildup of pressure in the system will boil over, causing widespread breakages in financial markets (The Great Cascading of the The Great Deleveraging) with the debt-ceiling crisis as the likely tipping point,” he said.

But this is not doom and gloom. Although Miller expects worry and fear to lead to sell-offs in the markets, he also sees opportunity ahead.

“The good news is that these signals indicate that we are nearing the bottom and portend the arrival of what could potentially become an extremely favorable period for new investments,” he said.

Of course, in this precarious environment, you’d want to be careful.

The good news? You don’t have to risk too much to get in the game. With crowdfunding platforms, it’s easy for retail investors to buy shares of more resilient real estate assets such as multifamily properties.

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