Commercial Magazine

Paying the Piper

Mortgage maturities continue to pressure the office sector

By Evelyn Jozsa

Office landlords are facing plenty of problems these days, thanks to high interest rates, reduced demand and depreciating asset values. Now, they can add one more headache to the list: the volume of maturing commercial real estate loans continues to put pressure on property owners and brokers as lenders and investors seek to minimize their exposure to the office sector.

Nearly $113 billion worth of mortgages on U.S. office buildings are set to mature by the end of 2024, including about $41 billion of loans that already matured by March, according to an analysis of property databases compiled by CommercialEdge, a commercial real estate market intelligence platform owned by Yardi.

This analysis, which includes more than 64,800 office properties nationwide with approximately $884 billion in mortgage debt, indicates that about 12.8% of the property loan values are on track to mature by year end. The data also reveals that most of the loans maturing in 2024 are found in top markets, Class A office spaces and urban areas.

As remote and hybrid work options continue to gain permanence, the office sector is undergoing long-term shifts, prompting industry stakeholders to recalibrate their strategies. In light of changing market conditions, commercial brokers, borrowers and lenders will need to assess the risk associated with refinancing or extending upcoming loans.

Scale of distress

The national office vacancy rate underscores these many market changes, with rates rising to 18.3% in April — a 210-basis-point increase year over year and a notable jump from the pre-pandemic rate of 13.4% in January 2020. The growing level of empty offices has played a role in the increasing number of commercial foreclosures and defaults. The Wall Street Journal recently reported that defaults in office buildings are reaching levels not seen since the aftermath of the 2008-2009 financial crisis.

The scale of distress from these maturing loans varies based on conditions specific to each market, including the class and location of buildings, the performance of individual properties and the current interest rates on their loans. For example, properties that don’t require long commute times and have a high number of amenities will likely have an easier time refinancing maturing loans.

The accompanying chart shows the highest percentage of office loan maturities and the vacancy rates in selected metropolitan areas. By dollar volume, Manhattan remains the metro area in the most danger of default due to its extensive total office space and premium pricing per square foot. In Manhattan alone, 50 properties have already seen loans totaling $6.8 billion come due. There are 68 more out of 1,665 office properties with loans set to mature between March and December of this year. Those loans were worth $9.8 billion.

Manhattan’s loan valuations are nearly double that of Los Angeles, the metro area with the next highest volume, where $5.9 billion in loans are due by the end of 2024. Other metros with significant loan maturities include Washington, D.C., with $4.5 billion; Boston, with $4.3 billion; and San Francisco, with $4.1 billion.

While Manhattan had the highest dollar volume of maturing loans between March and December, Nashville had the highest percentage of expiring office mortgages during the same period, at 17.1%. The Nashville market’s total mortgage volume is nearly $7 billion, with $1.2 billion due by the end of 2024 across 30 properties.

Overall, 11 metro areas will see at least 10% of their office mortgages (by dollar volume) mature by the end of 2024. Additionally, 17 of the top 25 markets have a higher percentage of maturing loans than the national estimate of 8.1%. Other than Nashville, metro areas with the highest percentage of loans maturing in 2024 include Minneapolis-St. Paul (14.5%), Atlanta (13.9%) and Denver (13.8%).

Determining factors

Brokers working with office landlords should be aware that maturing loans are concentrated in urban properties, with a much smaller amount found in suburban properties. Not surprisingly, primary markets are the leaders in volume of urban office mortgages coming due.

For example, all $9.8 billion of expiring loans in Manhattan are in urban assets, while in Los Angeles, $4.4 billion of the total $5.9 billion due by the end of the year are concentrated in urban areas. Boston has $3.3 billion in maturing loans tied to urban offices, while only $1 billion in maturing loans are linked to suburban properties.

Nashville had the highest percentage of maturing urban loans, with 13.5% of its loans concentrated in its urban core as opposed to its suburbs, followed by Miami at 8.9%, San Francisco at 8.6% and Minneapolis-St. Paul at 8.4%. Meanwhile, markets with the highest percentage of maturing suburban office loans due in 2024 include Detroit at 9.7% (encompassing $711 million in loans), followed by Dallas-Fort Worth at 7.7% ($2.2 billion) and Denver at 6.8% ($1.2 billion).

Another concentration is in higher-quality properties: About three-quarters of office loans maturing by the end of 2024 are backed by assets rated Class A+ and A, according to CommercialEdge research. In contrast, a much smaller amount of loans is backed by Class B and C assets. Among these, Manhattan tops the list with $6.9 billion in Class A+ and A property mortgages due to mature by the end of the year, followed by Los Angeles with $4.3 billion, Boston with $3.6 billion and San Francisco with $3.3 billion.

For Class B and C office properties, the most significant amounts of maturing mortgages are found in Manhattan ($2.9 billion), Los Angeles ($1.6 billion), Washington, D.C. ($1.4 billion) and Dallas-Fort Worth ($1 billion).

Delicate balance

The future intensity of distress in the office sector hinges on a delicate balance of factors, including interest rate trajectories, job market stability and evolving work models. Markets that are oversaturated with buildings or have experienced a significant drop in demand following the pandemic are at a higher risk of defaults.

According to the chart, markets with high vacancy rates and a large percentage of maturing loans by the end of 2024 include Detroit (a 31.3% vacancy rate as of March, and 10.6% of loans maturing in 2024); Houston (24.5% vacancy rate, with 9.5% of loans maturing this year); San Francisco (24% vacancy rate and 11.2% of loans maturing); Denver (22.1% vacancy rate and 13.8% of loans maturing); and Dallas-Fort Worth (21.1% vacancy rate and 12.8% of loans maturing).

As property owners become anxious to lease their spaces, office tenants will find themselves in a position with increased leverage. They will be able to demand more favorable lease conditions, incentives and enhancements to their workspaces. This shift not only reflects changing tenant expectations but also puts additional financial pressure on property owners, amplifying the challenge of keeping their properties profitable as office delinquency rates climb. However, property owners can potentially reduce risks and find refinancing opportunities by working closely with mortgage brokers and originators, who can help owners adjust to shifts in the market.

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A high percentage of the nation’s office sector is going to face maturing loans this year that, in many cases, will require refinancing. This is one more problem for property owners already dealing with high vacancy rates, inflation and high interest rates. In these changing market conditions, the impact of these factors varies depending on location and type of property. Faced with difficult choices, commercial brokers, borrowers and lenders need to work together and develop plans that will best serve the needs of all involved.


  • Evelyn Jozsa

    Evelyn Jozsa is a creative writer at CommercialEdge, covering commercial real estate trends and insights in the U.S. Jozsa was previously a senior associate editor at Multi-Housing News and Commercial Property Executive. She has an academic background in journalism and Irish studies. Jozsa has been covering the commercial real estate industry since 2017.

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