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The number of office loans that are showing signs of distress rose to its highest point in the past 12 years, according to a new report that paints a bleak picture for a segment of the commercial real estate sector that is struggling through the high interest rate environment.
Over $38 billion in office buildings face the threat of default, according to The Wall Street Journal, which cited data from the firm MSCI.
Owners are lumbering under the weight of pressure from both high vacancies, driven by changes in remote work following the pandemic, and high interest rates, which have combined to drive down the value of office buildings dramatically.
The office loan payoff rate, a measure of loans that are repaid when they come due, fell from 90 percent in 2021 to just 35 percent last year, The WSJ reported.
“It’s a pretty stark change,” Matt Reidy, director of Moody’s commercial real estate economics, told the news outlet.
Building owners who bought during the pandemic-era highs for real estate values now face a landscape where buildings are selling at half off or more.
A Los Angeles-based investor bought a building in Chicago’s Loop business district earlier this month for 88 percent less than the building traded for in 2013, according to Costar. That same scenario is playing out in downtowns across the country as building owners struggle to fill office space and businesses look to downsize their rental footprints.
Those discounted purchases are part of a trend as major institutional investors give the keys to buildings they own back to lenders and investors who were prepared for the crisis pick up properties at deep discounts.
Those discounts could keep coming.
Over the next year, $18 billion in office loans will mature, according to The WSJ, which added that nearly three in every four of those will be difficult to refinance because of vacancy, income and debt levels.
The WSJ reported that the investors who are buying discounted office buildings are trying to update the amenities in a play to attract tenants and keep buildings full.
