CommercialEdge: Maturing Loans Indicate More Office Sector Uncertainty

CommercialEdge, Santa Barbara, Calif., said office owners will continue to face difficulties, especially those with loans that mature over the next three years.

More than 9,500 office buildings across the U.S.–17% of all office stock–have loans set to mature by 2026, CommercialEdge noted in its National Office Report.

“The timing is difficult for buildings that have loan maturities on the horizon,” said Peter Kolaczynski, Senior Manager with CommercialEdge. “However, this won’t be just a 2023 problem but something we will monitor closely for the next three-plus years.”

But loans are not maturing equally across markets, CommercialEdge said. Among the largest office markets, three–Portland, Ore., Atlanta and Denver–have more than 10% of office stock subject to a maturing loan this year and two others, Chicago and Los Angeles, have more than 7% of office stock loans maturing this year. 

“Some of these markets also have more sluggish fundamentals, with rising vacancies and more moderate asking rates, adding more uncertainty for owners,” the report said. “With weak demand and the rising cost of borrowing, refinancing offices will be challenging unless they include solid leases with high-quality tenants.” 

In addition, some office types that were less subject to pandemic-driven changes, such as life sciences properties, are better positioned to weather the storm, CommercialEdge reported. As a result, sales activity is expected to be fueled by lab spaces, especially in large hubs such as Boston, the Bay Area and San Diego. 

The report said the national average listing rate for office space dipped 1.6% year-over-year to $38.28 per square foot in February. The national office vacancy rate increased 70 basis points during that time to 16.5%.

“Demand for office space has declined since the pandemic, leading to U.S. office vacancy rates rising steadily over the last three years,” the report said. “However, we have yet to see average listing rates fall in response.”

Office sales total $4.6 billion year-to-date through February, with assets trading at $232 per square foot on average, CommercialEdge said.