There is new evidence that remote and hybrid work models have permanently affected the office market as an increasing number of large office landlords are defaulting on their loans.
In Los Angeles, an asset management company recently defaulted on over $750 million in debt for a pair of 52-story towers. In New York’s financial district, a real-estate firm is in talks with creditors to restructure debt on a 34-story tower. According to the Wall Street Journal, returning the building to the lender is an option under consideration.
Every month, five to 10 office towers join the list of properties at risk of defaulting due to low occupancy, expiring leases, or maturing debt that would be refinanced at a higher rate.
Landlords have been able to keep up with their mortgage payments, primarily due to the long-term nature of office leases, which typically run for ten years or more. Lenders have been willing to extend expiring mortgages, which has helped to maintain the status quo.
Office owners have been facing a series of setbacks. The latest blow came from the commercial real-estate management platform VTS, which reported a 30% decline in new demand for Seattle office space since January 2022. This adds to the mounting negative news for office owners.
It has taken three years, but commercial office brokers are realizing the market will never return to what it was before hybrid work became the way of the world.
“There will be no great return. Seattle’s lights will not just turn back on again. We thought this in 2020, and we were wrong. Too much time has passed,” Newmark brokers Charlie Farra and Matt Betterman wrote in a report last week. The brokers say the Puget Sound region market, with nearly 19% of the market’s space available, could take up to three years to improve.
The tech industry is experiencing an increase in layoffs, while foot traffic for office workers in downtown Seattle while improving, remains at only 43% of pre-pandemic levels. Additionally, Amazon employees are resisting the company’s directive to return to the office by May 1.
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