About $24.8 billion of US office buildings were in distress at the end of the second quarter, overtaking the laggard of the former leading commercial real estate — hotels and retail properties.
MSCI Real Assets reported Wednesday that the overall value of offices that were in financial trouble or already repossessed by lenders rose about 36% from the first quarter.
At the end of June, $22.7 billion of retail real estate — including malls — and $13.5 billion of hotels were in distress. Distressed commercial real estate totaled about $72 billion, up 13% from the first quarter.
According to the report, “the office sector was responsible for the largest share of distress marketwide,” based on bankruptcy filings, defaults and other publicly reported property issues. “It is the first time since 2018 that neither the retail sector nor the hotel sector was the largest contributor.”
MSCI has identified an additional $162 billion in real estate in potential distress, with problems such as late loan payments, rising job vacancies, or debt maturity.
US offices are facing more pressure than other real estate sectors due to weak demand as remote work gains widespread acceptance. Office utilization in 10 major US cities is about half the pre-pandemic rate on average, according to badge-passing data from Kastle Systems Inc. More than 20% of office space in the United States was vacant as of June 30, brokerage Jones Lang LaSalle Inc. reported.
Office building prices fell 27% in the year through June, compared with a 12% decline for all types of commercial property, according to real estate analytics firm Green Street. The owners of companies such as Blackstone Inc. and Brookfield Asset Management Ltd and Starwood Capital Group made payments on office buildings they considered losing money.
Office properties with outstanding debt are among the most vulnerable because the cost of borrowing has risen since the Federal Reserve began raising interest rates last year in an effort to cool inflation. About $189 billion of office building debt is estimated to be due in 2023 with an additional $117 billion due in 2024, according to the Mortgage Bankers Association.
