Commercial real estate has become a debt timebomb, experts have warned, as office towers remain empty in once-bustling cities.
The new era of remote work means ‘zombie’ workspaces remain vacant – while higher interest rates make it more expensive to buy or refinance buildings.
Some $1.5trillion in real estate mortgages are due this year and next, bringing the market to a dangerous precipice. When the deadline arrives, experts warn owners may be forced to default instead of borrowing again to cover the bill.
Earlier this month, the landlords of downtown San Francisco’s Westfield mall stopped making mortgage payments on its $558million loan amid rising crime and tanking sales.
Meanwhile in New York, building owners are being forced to negotiate extensions on millions of dollars of debt after failing to secure financing.
The office availability rate for lease and sublease has soared across US cities this year
The new era of remote work means ‘zombie’ workspaces remain vacant – while higher interest rates make it more expensive to buy or refinance buildings
The owners of the Seagram Building, a 1950s skyscraper in Midtown Manhattan which is renowned for its modernist design, had to get a one-year extension on $1 billion of debt set to mature this year, according to Bloomberg.
Developer GFP Real Estate reportedly received a two-year extension on the art deco DuMont building after being unable to repay the building’s $103 million mortgage when it came due.
Large companies are increasingly urging workers to return to the office, with company executives at firms such as JP Morgan & Chase Co. ordering managers to ‘lead by example’ and return to the office five days a week.
According to building security company Kastle Systems, only about half of office workers in the Big Apple are back at their desks.
And a joint study from researchers at New York University and Columbia University found that offices in the city will lose 44 percent of their pre-pandemic value by 2029 because of the impact of remote work.
Across the country, values for offices have decreased by 27 percent since March 2022, according to data analytics company Green Street.
The Federal Reserve’s aggressive hiking of interest rates designed to hamper inflation has pushed down value by deterring buyers.
Big banks such as Wells Fargo are already cutting their losses by preparing to offload debts at a discount even when borrowers are up to date – a sign of their lack of faith in the once stalwart commercial real estate market.
The pressure on commercial real estate adds stress onto a financial system which is already reeling from the crisis in regional banks earlier this year.
In San Francisco, office availability rate for lease and sublease has soared to 32.7 percent in the first quarter of this year, according to real estate company Savills.
Wells Fargo recently sold a 13-floor tower for about $200 per square foot, down from the 2019 market peak of more than $1,000, according to real estate services company Newmark Group Inc.
Earlier this month, the owner of two of San Francisco’s largest hotels stopped making mortgage payments on the properties, letting them go into foreclosure as historic crime rates continue to deter tourists.
Park Hotels and Resorts announced that it stopped making payments on $725 million in debt tied to the Hilton San Francisco Union Square and Parc 55.
Developer GFP Real Estate reportedly received a two-year extension on the NYC DuMont building (left) while the owners of the Seagram Building (right) had to get a one-year extension on $1 billion of debt set to mature this year
Westfield in San Francisco (pictured) has announced that it is handing the building back to the lender
San Francisco’s largest hotel, the Hilton Union Square, left, is set to be foreclosed upon as the owner of the hotel and Parc 55, right, announced that it will no longer make payments on its $725 million loan
‘After much thought and consideration, we believe it is in the best interest for Park’s stockholders to materially reduce our current exposure to the San Francisco market,’ CEO Thomas Baltimore Jr said in a statement.
‘Ultimately, the continued burden on our operating results and balance sheet is too significant to warrant continuing to subsidize and own these assets,’ he added.
‘There’s significant stress,’ Harold Bordwin, from Keen-Summit Capital Partners LLC, which specializes in renegotiating distressed real estate, told Bloomberg.
‘People don’t give up assets so easily unless they just don’t see any hope and they recognize that they’re pretty well underwater.’
Cities beyond the coastal financial centers are also feeling the pain. Atlanta’s office availability rate climbed to 31 percent in the first quarter, according to Savills – almost double the pre-pandemic level.
Almost 30 percent of the office space in the city has debt maturing between now and 2025, according to property management software company Yardi Systems Inc.
In Houston, office space availability was up to a huge 32.5 percent in the first quarter of 2023, while 26.1 percent of office space is vacant in Chicago, 25.6 percent in Seattle and 22.1 percent in Philadelphia.
DailyMail
