These Office Markets Could Be in Trouble Next Year

It’s much easier to find an empty office than it is to find a positive trend in the office sector, according to the CommercialEdge National Office Report for December.

Loan defaults are set to rise, demand is down, expenses are up, and values have dropped.

The report generated by Yardi showed that nearly $150 billion of office loans are maturing by the end of next year, and more than $300 billion will mature by the end of 2026.

The risk these maturing loans pose varies by location, with maturing debt generally concentrated in primary markets, urban submarkets, and Class A properties, it said.

Physical occupancy rates remain “stubbornly low,” at about 50% to 55%.

Eight markets account for half of all maturing loan volume through the end of 2024. Manhattan leads the list of primary markets in potential trouble with $19.8 billion, followed by Los Angeles ($10.3 billion), Chicago ($10.1 billion), Washington DC ($8.6 billion), Houston ($8.1 billion), Boston ($7.9 billion), San Francisco ($6.6 billion) and Atlanta ($6.5 billion).

Perhaps most frightening, in Chicago, Houston, and Atlanta, the number of loans maturing before the end of next year accounts for more than a quarter of all office loan volume.

Astoundingly, more than two-thirds of loans maturing through 2026 serve as collateral for A or A+ properties, CommercialEdge noted.

Interest rates will highly influence the level of distress and delinquencies, CommercialEdge said.

“Banks will also play a key role, involving their willingness to extend agreements and their choices about how much exposure they want to have to offices in general,” according to the report.

“Investor demand for offices remains low and is unlikely to improve in the near term, our office real estate outlook indicates.”

Boston was the top market in office development this year with 13.5 million square feet underway at the end of November.