Fresh Deals Show How Office Values Have Fallen, Setting Off Debt Alarm Bells At Banks

Banks could start to intervene more aggressively in the commercial real estate market in the coming months because of an expected rise in nonperforming office loans.

Grant Thornton Insolvency Director Colm Dolan warned of several imminent high-profile property sales expected to close at about 15% below the asking price, the Irish Independent reported, which could lead to technical defaults on other loans, sparking action by banks.

Dolan blamed the scenario on the quantity of grey office space on the market and said key transactions among big corporates that have announced moves from their current offices will add to the supply of older premises requiring modernisation, which in turn could crystallise valuation drops in the sector.

After a moribund first quarter Dublin office takeup totalled 934K SF in Q2, the strongest quarter since Q4 2021, CBRE data showed, with active requirements over 2.7M SF, a 5% increase quarter-on-quarter. A host of major corporates have been seeking space, with Workday having chosen College Square for its new HQ and Vodafone linked with a 70K office search.

However, increasing deal volumes mean that the fall in valuations is becoming more transparent, and that could prompt banks to move to restructure debt or appoint receivers.

“Vacancy rates are at about 17% now. A huge amount has come on to the market this year, and there is still a huge amount in construction,” Dolan told the Irish Independent. “So you have this wave of stuff coming on the market at the same time and a lot of people exiting grey space.

“There are currently a few transactions in process, all of which appear to be struggling to achieve guide prices and are likely to end about 15% below the asking price.”

Until now, banks have been “as supportive and cooperative as they can,” he said. But attitudes are changing, and “we expect [the banks] to push the button harder as lower asset valuations are crystallised.”

Most owners have been able to stay within their loan-to-value covenants, but lower valuations mean that banks may feel that they have to move quickly to avoid any impact on their lending ability.

“Up to this, banks have generally allowed 12 months to cure these issues, but there’s no way that is going to be the case anymore,” Dolan said.