These 5 Markets Have the Most Office Loans Maturing

A loan on an office property coming up to maturity isn’t the same as having a mobster walking into your business, asking about payment, and remarking how it would be terribly if something bad happened to the place.

But the feeling of many investors, owners, and developers in the office space may feel eerily similar. Given the state of current interest rates and terms, many CRE loans that are coming to maturity are facing an uncomfortable squeeze.

Commercial Edge reports that in the next three years, 9,500 buildings, or about 17% of all office stock, will be up for renewal. The amount of space with loans maturing over the next three years will hold at about 380 million square feet. That doesn’t mean things will be pleasant.

“Recent high-profile defaults hint that the pain may be only beginning for office owners,” the firm wrote. “Columbia Property Trust defaulted on $1.7 billion in loans backed by seven buildings, Brookfield Asset Management defaulted on $784 million in loans for two office towers in downtown Los Angeles and RXR is reportedly considering handing the keys over to the lender for at least two of its New York offices.”

The distribution of the properties with the maturing loans also isn’t even, meaning there will be pockets of areas hit much harder. Atlanta, Denver, and Portland, Oregon all have more than 10% of their stock maturing. Chicago and Los Angeles each will see about 7% of their stock mature.

“Over the next three years, eight of the top 25 markets will see at least 20% of stock subject to a maturing loan, led by Atlanta (29.1% maturing by the end of 2025), followed by Portland (27.5%), Denver (24.3%), Chicago (23.0%), Los Angeles (21.5%), Washington, D.C. (20.4%), Austin (20.0%) and Dallas-Fort Worth (20.0%),” Commercial Edge wrote. “Some of these markets also have vacancy rates above the national average—with Atlanta sitting at 20.5%, Chicago 19.2% and Denver 17.6%—which will add more uncertainty for owners.”

Refinancing these building will be tricky. Some portion likely includes older if not obsolete offices. Borrowers might have to show “solid leases with high quality tenants” and expect to kick in additional equity to a loan. Owners might be tempted to sell, but prices have dropped from and average of $299 per square foot in Q4 of 2021 to $214 at the end of 2022. If a significant amount of stock in any metro region comes onto that market, that could translate into fire sales. Though Commercial Edge noted that falling prices could push the popularity of adaptive reuse — assuming that the buildings have the physical characteristics to make a transformation work.