Companies Are Defaulting on Office Loans at a Historic Rate

Yuriy K /
Yuriy K /

When COVID struck, many companies were forced to pivot and adapt to working remotely, most with little to no notice. Naturally, there were some small hiccups in the process, but many employers noticed that worker productivity was up, employees were happier, and they could save on overhead with no office rent. According to a report from The Wall Street Journal (WSJ) the owners of these now-empty buildings are at risk of defaulting on their loans. Currently, the trend is at its highest level since the fourth quarter of 2012.

Studying data from finance firm MSCI acquired by the WSJ, they revealed that $38 billion in office buildings are facing defaults, foreclosure, or another financial crisis. The defaults are part of a significant overall problem facing the commercial real estate market. With higher interest rates courtesy of the Federal Reserve and the COVID-led remote work proving to be a great idea for many, office owners are stuck in significant debt. A lack of tenants looking to keep cubicles or even managerial offices leaves these real estate conglomerates little choice but to default.

Commercial mortgage-backed securities (CMBS) payoff rates in 2023 were at their lowest since data was first gathered in 2007. Only 35% of office owners paid back their loans by the end of the term. Compared with 2021’s 90%+ rating, it’s clear that CMBS’ aren’t paying off like they used to.

WSJ reported Bill Demchak, PNC Chief Executive, said, “The problem you have in office is, in many instances, there is no cash flow at all…It is really a unique animal at the moment,” on an earnings call. For office owners, new amenities like snack bars, gyms, covered parking, and front desk security are being offered to entice more companies to bring back the office. Coming at a substantial expense, many see these as short-term answers to get companies away from remote work and better than the financial loss of no tenant.