Loans Loom Large: U.S. Office Building Owners Teeter On Edge Of Default

With one-third of mortgage volume on office properties due between now and the end of 2026, increasing distress in the office market is likely as weaker demand, rising costs and lower property values squeeze owners.

At the same time, banks and investors are trying to reduce their exposure in the sector.

U.S. office building owners are in danger of defaulting on their loans as nearly $150 billion worth of their mortgages mature by the end of 2024, according to a review of the CommercialEdge property databases. More than $300 billion of loans will mature by the end of 2026.

The review included more than 80,000 office properties in the U.S. with $920 billion of mortgage debt. It found that 16.1% of loans will mature by the end of 2024 and 32.7% will mature by the end of 2026.

Manhattan, New York, leads the largest markets with $19.8 billion of loans coming due by the end of 2024. More than $5 billion of office loans will mature through the end of 2024 in 10 metro areas and 10 have at least $10 billion maturing by the end of 2026. More than half of office loans by dollar volume will mature by the end of 2026 in Atlanta and Houston.

"The volume of loan maturities is worrying, coming at a time when the combination of weaker demand, rising costs and lower property values are squeezing office owners while banks and investors are trying to reduce exposure to offices," the report states.

Tenants Seize Negotiation Power

The pandemic-induced work-from-home trend has prompted companies to cut back on space requirements, especially in primary office markets with long commutes. Office vacancy increased to 17.8% nationally in September, up from 13.4% before the pandemic in January 2020.

While landlords are struggling, the trend favors tenants, who have more leverage to negotiate for favorable terms such as shorter leases and tenant improvement allowances. Tenants also are demanding more amenities, including cafeterias, fitness centers, improved air circulation and outdoor break spaces.

"As tenant improvements and other costs increase, owners find it increasingly difficult to maintain net income," according to CommercialEdge. "Consequently, office delinquency rates are rising and are likely to get worse as the growing number of underwater loans mature."

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