Lease Rollover Is the Other Office Mortgage Risk

The volume of CMBS loans, against office properties, that will mature by the end of next year is $75.74 billion, according to Trepp.

“That’s more than half of the $135 billion of all CMBS loans that were slated to mature this year and next,” they wrote. “Meanwhile, $1.08 trillion of the total $5.54 trillion universe of commercial real estate loans come due this year and next.”

Terms that can run up to ten years and practices that frequently involve refinancing rather than outright paying the balance mean a significant percentage of mortgages will come due in a given year. This year and 2025 as well, however, could be “fraught with risk,” Trepp says. Interest rates are much higher not only during the pandemic but ten years back. “The 10-year Treasury rate, against which most long-term mortgages are benchmarked, is now 4.44%. It ended 2014 at 2.17% and spent just about the entire year in the sub-3% range.”

Without sufficiently increased cash flow over the years — a history of higher rents or lowered operating costs — getting refinanced or paying off the original mortgage will be difficult. But even theoretically sufficient rent rolls require tenants who remain to pay. That is the other mortgage risk for office properties in particular.

“That wouldn’t be too much of a concern if office markets were vibrant, with low vacancy rates, strong demand, and healthy rent growth. But those factors are missing in most areas,” they write.

Trepp mentioned as an example San Francisco with “properties backing $1.3 billion of CMBS loans face the maturity of leases governing at least 50% of their spaces by the end of next year.” There are 48 loans, mostly office, “led by the $291.5 million mortgage against 222 Second St., a 452,418-square-foot office property in San Francisco’s South of Market, or SoMA, area.” The tenant base is all LinkedIn. The company has been putting space out for sublease, indicating too much-leased inventory. However, a LinkedIn lease of 156,659 square feet ends next December. Another lease for 148,664 square feet rolls off in 2026, with the company’s remaining lease for 76,212 square feet ending in 2027. The office market in San Francisco includes a downtown vacancy rate of 36.7%. How easily could landlords replace tenants?

There are 15 sizeable office leases in the city that will see between roughly 54% and 100% of leased space rolling by 2027. In Chicago, 15 leases will see between 62% and 100% rolling off by 2027. Another 15 leases in the New York area have between 55% and 100% rolling by 2027. In Washington, D.C., 15 properties have between 51% and 100% rolling off.

Again, a few examples, none of which is guaranteed to see major problems by 2027. But how many more cities face similar types of office challenges?