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Billions In Office Loans At Risk Of Distress As Tenants Flee Older Buildings

(BISNOW) Jon Banister, January 23, 2021

Many questions about the office market’s future remain unanswered as the pandemic nears the two-year mark, but one trend has become increasingly clear: tenants are leaving older buildings in favor of newer projects.

This accelerated shift has left owners of some aging office buildings with large vacancies and insufficient cash flow to pay pack their debt, putting billions of dollars of office-backed loans at risk. 

The flight to higher-quality assets had already taken off before 2020, but it reached new altitudes during the pandemic as tenants pushed for better air filtration, outdoor amenities and building sustainability ratings.

Additionally, some are now able to afford the higher-end space by shrinking their leased footprint because of the remote work shift and as the owners of newer buildings offer recordbreaking cash and rent incentives to sweeten their offers.

Given the long-term nature of office leases, these relocations have only occurred for a fraction of tenants that had expirations during the last two years, and this trend will continue to play out for several years. Experts say this will create not a sudden wave, but a continuous trickle of office assets becoming distressed in the coming years.

“The problems going forward are going to come from primarily markets that have sizable amounts of dated properties that are not particularly desirable to big drivers of demand these days,” Trepp Senior Managing Director Manus Clancysaid. “You’ll see episodes in New York, Chicago and other places where big buildings that back loans with nine-figure balances become distressed.”

In December, the CMBS delinquency rate for the office sector rose to 2.53%, up from 1.81% in November, according to Trepp. It represented the highest level since June 2020 in Trepp’s office delinquency rate metric, which measures CMBS loans that are 30 days delinquent or more.

Source: Bisnow