$117B In Office Debt Coming Due This Year, Pushing Some Big Owners To The Brink

A total of $117B in mortgages associated with office properties will be due this year, the Financial Times reports, citing Mortgage Bankers Association data, with an unspecified number of them at risk of default as refinancing proves difficult or impossible in the current climate.

“It’s going to be a problem to get some of these refinancings done,” Polsinelli Real Estate Finance Chair John Duncan told FT. “We’re seeing deals where even sophisticated borrowers are calling it a day.”

Although economic projections have improved in just the last month with the hope of potentially falling interest rates later on in 2024, property owners and the market in which they operate have a long road ahead, FT reported. 

“We are in the very beginning of trying to weather the office market downturn,” Richard Hill, head of real estate strategy at Cohen & Steers, told FT. “This is not driven by fundamentals; this has everything to do with financing costs going back up.”

In some cases, the weight of debt threatens to sink owners altogether.

Last month, KBS REIT III, a California-based office specialist, noted in a filing with the Securities and Exchange Commission that the company has $1.7B in loan maturities in 2024 and that its debt load could impact its solvency.

“Considering the current commercial real estate lending environment, this raises substantial doubt as to the company's ability to continue as a going concern,” the filing said, adding that it may try to sell assets to manage its liquidity needs.

“However, there can be no assurances as to the certainty or timing of the outcome of such efforts,” KBS REIT III said in its filing. “The company may relinquish ownership of one or more secured properties to the mortgage lender.”

Another KBS vehicle, KBS REIT II, has taken financial hits in the last calendar year as well. In March 2023, after a protracted negotiation process, it sold Union Bank Plaza in Los Angeles for $104M, less than half of what the entity paid for the property in 2010.

KBS isn't alone. Major office owners across the country are under similar financial stress, with debt overtaking their ability to pay.

Delinquencies among CMBS loans affiliated with office properties reached 5.82% in December. This is a significant increase from 1.58% in December 2022, but a 20-basis point dip from November 2023.