Real Estate Attorneys Predict Wave Of Office Defaults

Real estate attorneys surveyed by Bloomberg Law are almost all predicting defaults in retail and hospitality properties in 2021, but they also predict that office properties will see a large share of defaults this year.

Ninety-four percent of the respondents picked retail as one of the top three property types at risk of default this year, according to the company's 2021 Commercial Real Estate Bankruptcy Survey. Hospitality was the choice of 79% of those surveyed as one of the top three, while an equal percentage also picked office.

Multifamily was a top three of only 28% of respondents, while very few real estate attorneys selected industrial or healthcare as among the top three property types for default (6% and 5%, respectively).

"Cancellation of office leases and potential vacancies caused by permanent moves to remote work might be behind this choice," Bloomberg Law's Jeffrey Fuller wrote, referring to potential office property defaults.

Bloomberg Law also reported that through April 30 of this year, roughly 12% of hospitality properties were 90 days or more delinquent on their loans, while just over 5% of retail-associated loans were more than 90 days delinquent. Very few office-associated loans are that delinquent, however, according to Bloomberg: only 0.72% as of March.

Starwood Property Trust CEO Barry Sternlicht said last week during the company's Q1 earnings call that office properties in gateway cities are going to be under enormous pressure going forward.

Sternlicht singled out cities controlled by Democratic politicians for his ire, accusing them of putting landlords between a rock and a hard place, or between high taxes and rent controls.

"So that's a dangerous game to play, and that is a very difficult real estate environment," he said.

"We’re going to see some compression — significant compression in net rents, as rents fall, concessions go up," Sternlicht said, referring to the New York and San Francisco office markets, where Starwood has no loan exposure.

"There’s such enormous shadow vacancy in both of those markets," Sternlicht said.  "... You need gain, you need rents to go up. It’s not holding your own, and expenses going up is going to mean your net profits are going down. So on the margin, these big cities are in trouble."