Below are some highlights from a WSJ article last week. Everything we have predicted is slowly becoming a reality. We expect more for remainder of the year and will continue to follow carefully.
1. Defaults are reaching historic levels in the office market
as a growing number of owners capitulate to persistently high interest rates
and weak demand. More than $38 billion [worth of] US office buildings are
threatened by defaults foreclosures or other forms of distress according to
data firm MCSI. That is the highest amount since the fourth quarter of 2012
in the aftermath of the 2008/09 financial crisis.
2. Office owners are paying back their loans at a much slower
rate. As recently as 2021, more than 90% of office loans that were converted
into commercial mortgage-backed securities were paid off when they became due
according to Moody's. Last year that figure fell to 35% - the worst rate in
the history of the data which goes back to 2007.
Weitz- I'm not sure this figure can be highlighted enough. We went from 90% payoffs on maturity to 35% ..... simply put, this is a staggering issue for the owners, the general market and arguably most importantly, the banks. Once they are forced to take losses, we have some major risks of a capital concerns, shutdowns, etc. How far does the spiral go? How does the government intervene if at all?
3. In the next 12 months, 18 billion of the office loans
converted into securities will mature more than double the volume in 2023.
Moody's projects that 73% of loans will be difficult to refinance because of
the property income, debt levels, vacancy and approaching lease expirations.
Earlier this year, industry hopes were high that the Federal
Reserve would begin cutting rates. In recent weeks those hopes have faded as
inflation concerns have persisted.
4. The US offensive vacancy rate is currently at a record 13.8%
compared with 9.4 at the end of 2019 according to data service costar group.
Weitz- more than anything, this is the real problem. Most businesses have changed the way they operate / communicate, and large offices are simply no longer a necessity or priority. Even tenants that seek to renew they leases are generally doing so with a smaller footprint given the costs and change is structure.
For more information on Snohomish County Commercial Real Estate Investing, we are happy to help.
Weitz Commercial
108 Union Street
Snohomish, WA 98290
T: 206.306.4034
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