Most office building owners have been able to get out of the pandemic as corporate tenants have been locked into long-term leases. He continued to pay rent even when his employees stayed at home. Brokers say that now as more leases expire, an increasing number of tenants are shrinking their offices as they require less space under hybrid strategies that combine office with remote working, brokers say. have to say.
Leases for 243 million square feet of US office space are set to expire in 2022, the most office space to hit the market in a year since real estate services firm JLL began tracking this data in 2015. Is. Expiring leases represent approximately 11% of the country’s total leased office space.
The increase in office space in the market this year is a direct result of the pandemic. Many office tenants whose leases expired last year or in 2020 negotiated an extension of only one or two years, rather than renewing at a typical length of 10 years or more, as these firms tried to determine How little space can they require under the hybrid approach?
“I don’t think landlords have felt the pain yet,” said Jeffrey Peck, vice president of commercial real estate brokerage Sevilles. “Now they’re going to start feeling pain.”
Rising lease expirations represent a 40% increase since 2018 and pose a new threat to office landlords already frustrated by slow return-to-office rates and a national vacancy level of 12.2%. Huh. That rate for the duration of the pandemic is up from 9.6% at the end of 2019, according to real-estate data firm CoStar Group Inc.
It can go on and on. Real-estate analytics firm Green Street estimates that hybrid work will lead to a 15% drop in demand for office space. Since most building expenses are fixed, even a small drop in lease revenue can often result in a large drop in profits and a large drop in the value of the building. The economic slowdown could add further pressure as office leasing is highly dependent on the economy.
Troubled loans to office building owners are also on the rise. According to a Barclays report, in February, 21.2% of office debt packaged in commercial mortgage securities following the global financial crisis was being handled either by specialized servants or on the watch list, two closely watched categories, which could lead to error. This is the highest level since 2010.
Esther George, chair of the Federal Reserve Bank of Kansas City, said last month that she was concerned about risks from remote working and rising interest rates, which could harm office landlords and their lenders.
“There may be a concentration of community banks in this area in particular. We are seeing structural changes right now,” he said during an event organized by the Economic Club of New York.
Analysts will keep an eye on office loans when banks start reporting Q1 earnings in the coming weeks. Financial institutions with the biggest exposure to the office market include Heritage Financial Corp and Eagle Bancorp Inc, with more than 13% of their loan portfolios backed by office buildings, according to a report published Monday by financial services firm Stephens Inc.
So far most lenders haven’t taken a big hit from their office loans, but that could change if a decline in the lease leads to a drop in property values. “We are watching closely,” said Chris McGarrty, head of bank research for KBW.
According to data firm Trap Inc., there are about $1.1 trillion in debt backed by office buildings and about $320 billion of them maturing this year and next.
Not all news is bad. According to JLL, large technology companies have expanded 12.1 million square feet since the start of the pandemic. Lenders in the years before the pandemic also showed more caution than they did in the last two pre-recession periods. While loan volumes hit records, banks and other lenders mostly stay away from superhigh leverage levels that provide little cushion when values plummet.
But rising interest rates, low occupancy and a mountain of debt could result in a “triple-fold loss” for building owners, said Trap managing director Matthew Anderson.
The problem of credit has started coming to the fore. Blackstone Inc. is expected to hand back a troubled Midtown Manhattan office building with a debt load of $308 million to creditors, according to people familiar with the firm’s thinking. The building’s loan was handed over to a special servicer after its main tenant, L Brands, decided not to renew its lease when it expired last month. The retailer is taking up very little space in a new location, partly because it’s turning to a hybrid-action strategy.
A spokesperson for Blackstone said the building “presented a unique set of challenges that are not representative of our portfolio.”
Most tenants are not expected to ramp up their leasing activity anytime soon. Real-estate data firm VTS said an indicator of tenant demand—how much space companies are traveling—was nearly half its prependemic level in February. Companies increasingly prefer short-term deals, which adds to the uncertainty for landlords. Material Connections, a materials consulting firm, for example moved last year to a co-working space managed by Serendipity Labs in Manhattan, after ditching its much larger Park Avenue office.
New York-based law firm Herrick Feinstein LLP wants to reduce its office space by 30% to 40% when its lease expires in a few years, said Jonathan Adelsberg, co-chair of the firm’s real estate division.
He said he’s not thrilled about giving up his personal conference table, but spending less on office space means the firm’s lawyers can take home a higher salary. “You can have a big office or a big house,” he said. “I mean, what would you like?”
This story has been published without modification in text from a wire agency feed