Office Owners Face Loan Maturity Challenges

Image courtesy of CommercialEdge

The office sector faces challenges as interest rates rise, the economy slows and demand for office space declines. Office owners with loans maturing in the next three years—totaling more than 9,500 buildings and 17 percent of office stock—face an uphill battle. Eight of the top 25 markets surveyed by CommercialEdge will see at least 20 percent of their stock subject to maturing loans in the coming three years, with Atlanta leading the way at 29.1 percent. Recent high-profile defaults by Columbia Property Trust or Brookfield Asset Management may indicate that more pain is on the way for office owners.

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National average full-service equivalent listing rates averaged $38.28 per square foot at the end of February, down 160 basis points year-over-year. Average listing rates haven’t decreased significantly despite the quality of space listed and the role of concessions in attracting tenants. Landlords may be cautious about lowering listing rates due to concerns about the impact on property valuations. Meanwhile, the national office vacancy rate continued its upward trajectory, clocking in at 16.5 percent in February, up 70 basis points from the same period last year.

The growth of office-using sectors slowed down in February, with only 19,000 jobs added, a 2.4 percent increase year-over-year. The deceleration is attributed to tech layoffs, with companies such as Google, Microsoft, Salesforce and Amazon reducing their workforce. This will have the most significant impact on San Francisco, the Bay Area and Seattle, but other markets like Austin, Manhattan and Northern Virginia will also feel the effects.

Life sciences drive pipeline growth

Nationwide, the under-construction pipeline had 123.5 million square feet of new office space under construction, or 1.9 percent of total stock, according to the CommercialEdge office report. An additional 271 million square feet was in the planning stages, but some of these projects may be delayed or canceled due to remote and hybrid work becoming more prevalent.

However, the life science sector is thriving, particularly in Boston, the Bay Area and San Diego. As of February, Boston had more than 13.5 million square feet of office space underway, accounting for 5.6 percent of total stock; San Diego followed with 4.6 million square feet underway, or 5.0 percent of stock, then the Bay Area with 5.9 million under construction, representing 3.0 percent of stock. Meanwhile, office investment in the first two months of 2023 totaled $4.6 billion.

Read the full CommercialEdge office report.