Commercial real estate assets, particularly those exposed to office properties, continue to languish under elevated vacancy rates. Though many companies have implemented return to office policies, layoffs, consolidation, and bankruptcies in the broader economy appear to be stunting a potential rebound in demand for floor space in office settings. Though prices for REITs focused on commercial real estate have already experienced downturns, short interest among those firms is still on the rise.
Just as lacking occupancy has strangled cash flows from office properties, floating rate mortgage agreements have experienced a drastic increase in the size of monthly payments. Major real estate firms like Brookfield Asset Management have already begun choosing default over refinancing at current rates for some buildings. Maturities due on commercial real estate are only set to rise further throughout the next several years.
Related REITs and Funds: Boston Properties, Inc. (BXP), Brookfield DTLA Fund Office Trust Investor Inc. (DTLA-P), iShares CMBS ETF (CMBS)
Headwinds facing commercial property owners appear to be strengthening. MRP noted last month that risk is generally rising in the commercial real estate space, which can be seen in the types of commercial mortgages coming to market. Per Bloomberg data, Sales of Commercial Mortgage Backed Securities (CMBS) deals without government backing have fallen more than 80% this year. The Real Deal notes that leading commercial real estate firms including CBRE, JLL, Colliers and Cushman & Wakefield, and others have moved forward with cost-cutting measures, including layoffs. More recently, Morgan Stanley analysts suggested that commercial property valuations could drop by as much as -40% while nearly $1.5 trillion in debt is due for repayment by the end of 2025. Over the next four years, debt maturities on commercial real estate properties are set to continue climbing, peaking at $550 billion in 2027.
Demand for office space is becoming particularly concerning, as average office vacancy rates across the US rose to 16.9% at the end of the first quarter, up from 12.4% two years ago. JLL data shows that New York City’s office vacancy rate had risen to a record 16.1% in the first quarter, representing more than 76 million square feet. That seems a bit counterintuitive, considering many companies have implemented return to office plans and listings for remote jobs have dwindled, but a rising wave of layoffs has helped many firms to consolidate the office space they’re occupying and cut costs. Moreover, corporate bankruptcy filings, which reached a 12-year high across the first two months of this year, have begun to hollow out the number of companies that may have demanded office space.
Prices on high-quality office properties have fallen about -25% in the past year, according to Green Street data, cited by Bloomberg. About 4.8% of office properties with CMBS were managed by special servicers in March, a third party which will work with a borrower that’s…
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