Office Landlord Defaults Are increasing, and Lenders are Preparing

The office sector has been hit hard by the combination of hybrid and remote work, tech layoffs and attendance levels that are a mere half of pre-pandemic rates. As a result, the number of big office landlords failing to make their loan payments is growing, a worrying sign that these trends have caused long-term damage. With interest rates and vacancies continuing to rise, many property owners are being forced to restructure their debts or default entirely.

What’s going on:

The number of large office landlords missing their loan payments is increasing, signaling that more developers feel that remote and hybrid work trends have caused lasting harm to the office sector.

Investment company Brookfield Asset Management recently stopped paying back a combined $750 million in debt for two 52-story towers in Los Angeles, as revealed in a February securities filing.

Real estate company RXR is presently talking with creditors to renegotiate debt for a 34-story building in Manhattan’s financial district, and giving the building to the lender is a possible resolution.

Why it matters:

Cushman & Wakefield has forecasted that by the end of the decade, the U.S. will experience an all-time-high of 1.1 billion square feet of vacant office space, which is a dramatic increase from the 688 million square feet recorded in 2019.

With office attendance stagnating at just half of pre-pandemic levels due to the combination of hybrid and remote working, along with tech industry layoffs, it has spurred owners to restructure debt or default as interest rates and vacancies continue to surge.

How it’ll impact the future:

Owners will now have to decide whether they should continue to put money into their buildings or if they should give the spaces back to the lender.

“There is one hope for legacy CBD office space, namely the adaptive reuse of these properties for other individual or multiple uses. This kind of redevelopment requires special skills and experience that is hard to find. It also requires owners of these properties to get real about values so that new projects can begin,” workplace and real estate expert Francis Saele said on LinkedIn.