- Hundreds of loans for office buildings are coming due at a very bad time.
- Loans were made in an era of low interest rates and are now difficult to refinance.
- Too many defaults could trigger a banking crisis and hurt the economy
Billions of dollars in loans for office buildings coming due could wreak havoc on the U.S. economy as interest rates soar.
About $117 billion worth of debt is expected to come due this year and will need to be repaid or refinanced, according to the Mortgage Bankers Association.
Most are at risk of defaulting on their debts, incurring huge losses to banks and developers and forcing some into bankruptcy.
Office space owners across the country may not be able to refinance at higher rates because they took out loans when interest rates were half what they are now.
Unlike mortgages, commercial loans are mostly interest-only and require you to pay the original price at the end or refinance and start the process again.
At the same time, revenue from office space has declined since the pandemic, with many employees working from home and many companies downsizing their facilities.
Economists found last month that 40% of office loans on banks’ balance sheets are underwater, meaning they owe more than their properties are worth.
The small and medium-sized regional banks that financed the acquisition are not large enough to handle losses, so they could be at risk if the loan defaults.
Moody’s Analytics estimates that 224 of the 605 soon-to-expire loans will be difficult to repay or refinance because the owner has too much debt or the building doesn’t generate enough revenue.
Analysts predict that the building must generate at least 9% of the debt in annual income or owners will have trouble refinancing.
One example is the Seagram Building on Park Avenue in Manhattan, which was foreclosed on for $760 million in 2012.
The loan assumed the building would generate $74 million in annual revenue, but its previous highest revenue was $69 million in 2018 and only $27 million in 2022 . financial times.
The light at the end of the tunnel for office space owners is that the Federal Reserve is expected to start cutting interest rates sooner than expected.
Interest rates have been raised to their current level of 5.5% to curb the spike in inflation over the past two years.
But now that the inflation that destroyed household finances has eased faster than expected, interest rates could start to fall.
Market analysts hope this will limit the damage as $1.5 trillion in mortgage loans come due over the next two years.
As this situation looms, major banks such as Wells Fargo are already cutting losses by preparing to repay debt at a discount, even if the borrower is current. This is a sign of banks’ distrust of the once robust commercial real estate market.
Meanwhile, rising interest rates aimed at curbing inflation continue to depress property values by discouraging buyers, a phenomenon exacerbated by continued office vacancies.
The pandemic-induced phenomenon comes as remote work has maintained its prominence since it surfaced during the pandemic, with its emergence hurting offices and now banks provides financing.
Some lenders have indicated they are willing to take on losses on real estate loans that are currently performing well, as multiple experts continue to warn that this asset class is the “next shoe to drop.”
Recent turmoil in the banking industry has raised the possibility of another recession caused by the mortgage crisis.
In bad news for landlords looking for new leases for office buildings, the prospect of widespread defaults and the resulting drop in demand could curb construction and development in major U.S. cities. Many are still struggling to recover in the aftermath of the financial crisis. Pandemic.