The Cities With the Most Class B Office Pain

As the office market continues with its well-known struggles, many landlords are facing maturing loans with expiration dates of between now and the next three years or by year-end 2026. Altogether, more than 19% of office properties are experiencing this quandary, according to CommercialEdge.

In the past, many companies simply renewed their leases, but the new financial headwinds and expiring leases are becoming a potential catalyst for markets across the country to be disrupted, according to the report. The loans on office buildings set to expire are significant, representing 1.3 billion square feet.  The problem is compounded for certain properties—namely Class B and C—which are considered functionally obsolete due to their age as shiny new Class A towers with better layouts, more amenities and possibly more outdoor space tempt workers to return to work.

According to CommercialEdge, loans on 18.1% of Class B assets, which include more than 594.2 million square feet, are set to mature by year-end 2026. Atlanta leads the pack with this problem with 29.8% of its existing Class B inventory facing loan maturity. Its leasing activity in recent months reflects the tenant preference for Class A office space. For example, Sage Software signed a 47,000-square-foot deal on a timber office building underway on Atlanta’s BeltLine.

Atlanta isn’t alone. According to Cushman & Wakefield research, Class A buildings accounted for 80% of new leasing activity in Washington, D.C. while Class B and C assets there accounted for only 14% and 5%, respectively.

Denver follows the same trajectory with 26.1% of its respective Class B office space facing loan due dates. What makes this fact a bit surprising is that it used to be among the cities with a thriving tech niche, which has now been hit by the pullback of tech firms. Specifically, the 290 maturing loans tied to 20 million square feet of that city’s Class B office space make up nearly two-thirds of all upcoming office debt there. Furthermore, it has a high vacancy rate, which hit 20.8% in August.

Seattle is another tech market facing high vacancy rates of 22.4% in August and 19% of its Class B office space facing maturities between now and 2026.

Other cities may not have as much space facing these same maturing loan challenges, yet they still face the problem. Washington, D.C. has 31 million square feet of Class B office space nearing loan maturity, followed by Los Angeles with 27.5 million square feet and Chicago with 25.5 million square feet—the largest number in the Midwest–and a total of 19.6% of its metro’s Class B office stock, Its vacancy rate reached 17.9% last month, in line with the 17.5% national average.

In the Northeast, Pittsburgh has the highest percentage of Class B offices subject to maturing loans in the same timetable with one quarter of its space affected or a total of 7.7 million square feet with expiring loans. The flight-to-quality trend remains a problem there, too, with 55% of new leases signed for class A office spaces in the first six months of this year.

And how is Manhattan faring, often a good benchmark for other office-centric city trends? It has the largest volume of Class B office space facing the challenge with a total of 25.3 million square feet. A recent Bloomberg analysis found that about 90% of the city’s office stock is 20-plus years old, making it likely that leasing managers weigh newer, quality-rich properties rather than stay in their vintage quarters. At the same time, there’s some incentive to stay put. The city’s recently announced Manhattan Commercial Revitalization Program offers property tax abatements of up to 20 years to owners that renovate aging office buildings south of the city’s 59th Street. Older may make it very in to stay put.