This article is the fourth installment in a series that delves into the truth behind negative headlines. Previous articles have explored topics such as “CRE Experts Dismiss Doom-and-Gloom Office Predictions” and “Decoding the Office ‘Doom Loop’.”
At first glance, recent statistics may seem concerning. According to a report from CommercialEdge, office debt across the nation totals $920 billion, with nearly $150 billion of mortgages set to mature by 2024 and over $300 billion by 2026.
Experts in commercial real estate (CRE) acknowledge that leasing, valuation and debt maturities have been challenging for the office sector. However, it’s important to note that this category encompasses a wide range of properties – from older suburban Class B buildings to high-end urban core assets. Therefore, while some office loans are approaching maturity dates, not all buildings are at risk.
The Not-So-Good News
Industry professionals do recognize that debt maturities pose an issue for many within the office sector. They also don’t sugarcoat this problem – for certain owners facing maturing loans can be quite serious.
Adam Finkel of Tower Capital explains: “Some properties may struggle to meet LTV (loan-to-value) and DCR (debt-coverage ratio) requirements and will require significant cash infusions from sponsors.” He adds that large offices in major cities like Los Angeles or New York have already been returned back to lenders while others with prime locations may sell at discounted prices due market conditions.
Similarly Adam Showalter with Stream Realty Partners notes: “90% of office buildings currently carry some form of mortgage maturing within five years,” adding how current values often fall short compared against outstanding loan balances owed on these same structures today.” Showalter believes interest rates could change over time given current Federal Reserve policies but fears many landlords won’t make it until then due looming loan deadlines before any potential rate adjustments occur.
Eli Randel, with CREXI agrees: “Refinancing was once a viable option for maturing debt but today’s market conditions make it increasingly difficult.” He adds that rising capital costs and declining property values only complicate matters. Still, he remains optimistic noting how some owners can work out creative solutions with their lenders or simply wait until the right opportunity presents itself to refinance.
Aarica Mims of KDC echoes this sentiment saying: “As loans come due, landlords may be shocked by higher rates – perhaps 8% versus the 4% they secured years ago.” She also notes how current market conditions have made refinancing more challenging than ever before.
But Not All Doom-and-Gloom
Fortunately not all office buildings are struggling in this environment. Scott Morse of Citadel Partners explains that those who purchased properties five to seven years ago and now face loan maturities might still find ways to extend their terms by one or two additional years which could help them weather any downturns ahead. However those facing expiring notes within next year or so must contend with underperforming assets lacking key amenities which could spell trouble for these same landlords moving forward according Morse.
Petra Durnin from Raise Commercial Real Estate points out that office properties without looming debt deadlines tend boast strong fundamentals such as low vacancy rates coupled long-term leases held by credit-worthy tenants – making them less susceptible during times like these when other owners struggle just stay afloat financially speaking. Additionally she mentions mixed-use developments featuring high-end amenities often generate multiple revenue streams helping offset potential cash flow issues faced elsewhere throughout portfolio holdings owned managed her firm today across Southern California region where she specializes representing clients seeking prime commercial space opportunities here locally too!
What About Cash Flow?
Again it depends on each individual situation says Petra Durnin adding some building owners may choose return keys back lender while others will seek alternative options available including finding new buyers willing step in help. “Current debt scenario serves as reset button asset values,” Durnin explains. “There’s significant amount capital waiting sidelines for this very reason.” She believes investors who can afford acquire properties without worrying about interest rate fluctuations could find great value core assets located within top markets across US today.
Hayim Mizrachi with MDL Group agrees noting how not all office buildings face same challenges when it comes to maturing loans: “If lenders treat entire category equally then yes we have problem but thankfully that isn’t case here.” He adds there are many different types of offices out there – some performing better than others depending on location, tenant mix and other factors which must be considered before making any broad generalizations about state office market overall.
The Bottom Line
Debt maturities represent just one more hurdle facing the office sector these days but they don’t necessarily spell doom-and-gloom for every building owner either according experts interviewed by Connect CRE recently. Instead each property should be evaluated individually based upon its unique characteristics before drawing any conclusions regarding health broader commercial real estate industry as whole moving forward into future ahead!
