Office Woes Set to Continue as $1 Trillion in Debt Comes Due
Commercial real estate loans worth roughly $900 billion will come due through 2024, after an era of cheap debt, which is sending chills through the rest of the roughly $5.5 trillion commercial real estate debt market. This trepidation comes as creditors are eager to avoid steep losses on half-empty office buildings in the wake of the pandemic.
A year ago, office property prices in this roughly $3.2 trillion slice of the U.S. commercial property market were climbing, even as executives struggled to coax more staff back to offices. A year later, old and outdated office towers remain a key source of dread, but lenders now also must navigate stress in the banking system, tighter credit conditions, and a Federal Reserve that appears committed to keeping interest rates restrictive, despite cracks in the banking system emerging a year into its interest rate-hiking campaign.
The commercial mortgage-backed securities (CMBS) market isn't the biggest lender to U.S. commercial properties, but it matters as a key funding source for landlords, and as the closest thing to a real-time snapshot of credit conditions in the property landscape. Even with a deal with regulators on Monday to sell the deposits and loans of Silicon Valley Bridge Bank out of receivership to First Citizens Bank, a tough backdrop still lies ahead for landlords, particularly if credit tightens further. Specifically, the squeeze on high-growth tech companies is cause for major concern for landlords, with Pinterest Inc. (PINS) on Monday being the latest to shed San Francisco office space.
CMBS credit spreads in March reflect high anxiety from investors about commercial real estate and default risks. Higher risk bonds with BBB- ratings were pegged at 950 basis points above the risk-free benchmark, or a yield of about 13%. Some Wall Street strategists think property prices could fall 30%, while an estimate from Fitch Ratings in 2021 warned that office values could plunge by 54% if companies and workers were to adopt a work-from-home strategy of three days a week.
It took years for commercial property lending to revive after the global financial crisis, and what followed next was a decade of low rates that may soon backfire, not only for landlords with debt coming due but also for lenders who let borrowers take out billions in cash in the process. Rows of eerily vacant 1960-era office buildings filling big-city skylines have become almost a no-go zone for many lenders, while a smaller share of newer trophy buildings have attracted tenants.
The situation is tough for landlords, particularly if credit tightens further as $900 billion of commercial real estate loans come due. Office landlords will have to brace themselves for a lot of pain and uncertainty in the near future. Only time will tell how the CRE industry navigates this challenging period.
