By the end of the second quarter, the distress experienced by US office buildings had reached around $24.8 billion, outpacing the challenges faced by leading commercial real estate sectors such as hotels and retail properties.
According to MSCI Real Assets’ report on Wednesday, the aggregate value of financially troubled or lender-repossessed office properties experienced a significant increase of approximately 36% from the first quarter.
By the conclusion of June, distressed retail properties, which included malls, amounted to $22.7 billion, while distressed hotels reached $13.5 billion. The combined total for all troubled commercial properties stood at nearly $72 billion, marking a 13% increase from the figures reported in the first quarter.
The situation for offices is expected to deteriorate further.
MSCI has identified an additional $162 billion worth of properties that could potentially face distress, exhibiting issues like delinquent loan payments, high vacancy rates, or maturing debt.
Compared to other real estate sectors, US offices are experiencing increased stress due to weakened demand as remote work becomes widely accepted. Badge-swipe data from Kastle Systems Inc. indicates that office usage in ten major US cities is averaging about half of its pre-pandemic rate. Furthermore, as of June 30th, brokerage firm Jones Lang LaSalle Inc. reported that more than 20% of US office space remained vacant.
Green Street, a real estate analytics firm, reported that office building prices fell by 27% in the year ending in June, which is significantly higher than the 12% decline observed for all other commercial property types. n response to this pattern, corporate landlords such as Blackstone Inc., Brookfield Asset Management Ltd., and Starwood Capital Group have halted payments on office buildings they deem unprofitable.
Among the various commercial property types, office properties facing maturing debt are particularly vulnerable to stress, mainly due to the significant increase in borrowing costs. This rise in borrowing costs has been a result of the Federal Reserve’s actions to raise interest rates in an attempt to mitigate inflation. According to the Mortgage Bankers Association, there is an estimated $189 billion of debt on office buildings scheduled to mature in 2023, with an additional $117 billion due in 2024.