Loan defaults for office buildings reach almost historic levels

May 1 – Loans for office buildings are on shaky ground. Millions of square feet of office space is available for rent, but no one’s signing up. 

A lot of owners just can’t make payments on the loans.  

More than $38 billion of the loans could be defaulting due to increases in the interest rate and no interest in the office space, according to reports. 

This is the highest it’s been since 2012.

In fact, some of the loan balances are actually higher than the property values. 

Attorney Clint Barkdoll said, “It’s a huge problem, particularly in metro areas. There’s been reporting on this the last couple of years but a lot of these loans are now coming to the point that something’s going to have to be done. You look at the reporting that’s often cited in places like San Francisco. Washington DC is another place. They’ve never returned to pre-pandemic office occupancy levels. Some of these metro areas are only about half, maybe 60% occupancy of what they were pre-pandemic. So in other words, you’ve got just millions of square feet of empty office space sitting in these city downtowns. They are collateralized with big mortgages and of course the landlord’s now, they’re not going to be able to pay and there’s where the banks have some real exposure because what do you do with these empty buildings? They’re very difficult to repurpose into apartments or a commercial space.”

Economists have been voicing concerns about this for the last few years. 

Barkdoll added, “I saw just yesterday the shops at Crystal City, that’s right underneath that Crystal City metro outside of Washington DC near Reagan National Airport, they announced yesterday they are closing entirely effective October 1. Hundreds of thousands of square feet of office and retail space.”

What will become of the space? 

Barkdoll said it’s “not clear what they’re going to do with it. If you look at the announcement, they’re saying there were just no tenants, no demand for the space and you do wonder, are some of these things just going to become white elephants that are going to be riddled all over the country? It could become a real challenge for municipal governments. How do you address these empty spaces?”