2D — July 2023 — Brokerage Directory — M id A tlantic Real Estate Journal
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B rokerage D irectory
By Todd C. Monahan, Wolf Commercial Real Estate, LLC/CORFAC International Office landlords facing debt crisis
T
he debt crisis facing many office building landlords may have
and regional banks have exten- sive real estate loan portfolios and now have stricter reserve requirements. Most multi-tenant office building loans have three- to five-year terms and typically come with one- or two-year extensions. Many loans are interest only and were negoti - ated pre-pandemic, when inter- est rates were at historic lows in the 2.5-3.0% range. Office market dynamics were crest - ing, with rising rents, limited vacancy and strong demand indicators. In the corporate war for talent, companies were
investing heavily in their of - fice space with elaborate con - ference rooms, collaborative areas, open kitchens, gourmet coffee and sometimes even beer on tap. Office landlords were also in an arms race to provide all the requisite amenities employers were seeking. In order to com- pete for tenants, landlords had to offer fitness centers, lounges, shared conference and meet- ing space, secure bike storage, rooftop patios and more. Pre- pandemic interest rates were at record lows and debt was cheap, so many landlords that
refinanced after 2015 were taking out increasingly larger loans to add these amenities and offer large tenant improve- ment allowances to attract and retain tenants. Pandemic Hangover The pandemic and remote work trend changed every - thing. Now with loans coming due, office market dynamics are increasingly challenging. Office vacancy rates are over 20% in many major metros, not including shadow vacancies. It is estimated that one-third of all office leases in the U.S. will
expire by 2026 and companies that want to retain office space are frequently downsizing. Given this, vacancy rates are likely to rise dramatically in the coming years. An estimated $1.5 trillion in debt maturities are coming due by the end of 2025. With these market dynamics playing out, some landlords are threaten- ing to “give the keys back to the bank” or already have. Over the past few months, the property giants RXR, Columbia Property Trust, Brookfield As - set Management, and others have collectively defaulted on billions in commercial property loans. Such defaults are partly an indication of real struggles and partly a game of chicken. Naturally the banks don’t want the properties, but are often reluctant to refinance. Positive Signs There are positive signs in certain situations. Work - space Property Trust obtained a two-year extension for a $1.3B CMBS loan associated with a portfolio of about 10M square feet of suburban office and industrial space, which represents roughly half of its holdings. The loan is tied to 146 properties in 14 markets nationwide, which includes a portfolio in Chesterbrook and Horsham, Pennsylvania, that WPT acquired from Liberty Property Trust. In May, the loan was trans - ferred to a special servicer and it was scheduled to mature this month without any extension options. An important part of the deal was that the existing continued on page 12D
a far great- er impact than many are aware. Not only are many office properties overlever- aged, but in some cases,
Todd Monahan
so are their lenders. Many lenders are trying to reduce their office loan exposure and are reluctant to refinance their borrowers’ loans. Many small
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