Distressed US offices jump to .8 billion, overtaking malls, hotels

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Up 36% from Q1

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About US$24.8 billion of U.S. office buildings were in distress at the end of the second quarter, surpassing previous leading commercial real estate laggards — hotels and retail properties.

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The total value of offices that were financially troubled or already repossessed by lenders shot up about 36 per cent from the first quarter, MSCI Real Assets reported Wednesday.

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At the end of June, US$22.7 billion of retail properties — including malls — and US$13.5 billion of hotels were in distress. The total for all troubled commercial properties was almost US$72 billion, up 13 per cent from the first quarter.

“The office sector was responsible for the largest share of market-wide distress,” according to the report, based on filings for bankruptcies, defaults and other publicly reported property issues. “It’s the first time since 2018 that neither the retail nor hotel sector was the biggest contributor.”

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MSCI identified an additional US$162 billion of properties in potential distress, with problems such as delinquent loan payments, high vacancies or maturing debt.

U.S. offices face higher stress than other real estate sectors because of weak demand as remote work gains widespread acceptance. Office use in 10 major U.S. cities is at about half of its pre-pandemic rate on average, according to badge-swipe data from Kastle Systems Inc. More than 20 per cent of U.S. office space was vacant as of June 30, brokerage Jones Lang LaSalle Inc. reported.

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Prices for office buildings fell 27 per cent in the year through June, compared with a 12 per cent decline for all commercial-property types, according to real estate analytics firm Green Street. Corporate landlords such as Blackstone Inc., Brookfield Asset Management Ltd. and Starwood Capital Group have stopped payments on office buildings they’ve deemed to be money losers.

Office properties with maturing debt are among the most vulnerable to stress because the cost of borrowing has soared since the Federal Reserve started raising interest rates last year to try to cool inflation. About US$189 billion of debt on office buildings is estimated to mature in 2023 with an additional US$117 billion due in 2024, according to the Mortgage Bankers Association.


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