Time's Up, Office Loans: It's Payback Season


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As the landscape of office work continues to evolve in the wake of the COVID-19 pandemic, a growing number of office building loans are reaching maturity, and Class B assets are more likely to default because of the flight-to-quality trend that favors Class A spaces.

Loans on 18.1% of Class B offices are set to mature between 2023 and 2026 across the country. Atlanta leads the U.S., with 29.8% of its Class B office spaces subject to expiring loans, according to a recent report from CommercialEdge.

In Denver, the 290 maturing Class B loans tied to 20 million square feet make up nearly two-thirds of all upcoming office debt in the metro area, and loans on 25% of Pittsburgh’s Class B offices face expiring loans — the highest percentage in the Northeast.

“The once-stable office sector is still grappling with lingering challenges created by the pandemic as remote work continues to gain permanence and office space demand continues to fall, driving vacancy rates to new highs,” the report states.

Landlords and property owners are grappling with the looming challenge of refinancing or selling office buildings, some of which have been pillars of the business community for decades.

Investors and lenders are leery of office assets because of weakened fundamentals and high interest rates. The uncertainty is making it more difficult for property owners to use traditional refinancing strategies for properties approaching maturity.

Experts suggest that adaptation and innovation will be key for property owners to navigate these challenging times amid the uncertainty. Some office building owners are exploring ways to repurpose the spaces by transforming them into residences, flexible workspaces or mixed-use developments.

Class B Maturities by Metro 2020 to 2026

Market

Vacancy Rate

Number of loans

Square feet

% of stock

Atlanta

18.73%

228

18.4 million

29.8%

Austin, Texas

21.22%

114

7.5 million

21.4%

Baltimore

18.12%

119

9.6 million

17.4%

Bay Area

19.25%

259

19.5 million

16%

Boston

10.55%

237

20.7 million

16.3%

Bridgeport-New Haven, Connecticut

18.47%

129

7.96 million

15.75%

Charlotte, North Carolina

15.45%

75

5.2 million

18.9%

Chicago

17.77%

313

25.5 million

19.6%

Dallas-Fort Worth

18.53%

304

23.9 million

19%

Denver

20.77%

290

20 million

26.1%

Source: CommercialEdge


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 “Once a routine phase in the real estate, maturing loans have become a potential catalyst for significant disruption in the market,” the report states. “Given current conditions, a surge in defaults continues to loop, but the specific extent remains unclear. The scale of distress will depend on market-specific conditions and factors such as building class and location, individual property performance and the existing interest rate on the loans.”

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