Office Landlord Defaults Are Rising as Post-Pandemic Business Changes Take Hold

According to news sourcesthe number of big office landlords defaulting on their loans is on the rise, fresh evidence that more developers believe that remote and hybrid work habits have permanently impaired the office market. 

The giant investment manager Brookfield Asset Management recently defaulted on a total of over $750 million in debt for a pair of 52-story towers in Los Angeles, according to a February securities filing. Real-estate firm RXR is in talks with creditors to restructure debt on 61 Broadway, a 34-story tower in Manhattan’s financial district, according to people familiar with the matter. Handing over the building to the lender is among the options under consideration, these people said. 

In another sign of distress, a venture of an investment manager affiliated with Related Cos. and BentallGreenOak is in similar debt-restructuring talks over a $150 million warehouse-to-office conversion project in Long Island City, N.Y., that hasn’t filled up as much space as expected, according to people familiar with the matter. 

Five to 10 office towers each month join the list of properties at risk of defaulting because of low occupancy, expiring leases or maturing debt that would have to be refinanced at a higher rate, according to Manus Clancy, senior managing director with data firm Trepp Inc.

Concerns over the health of the office building industry have mounted throughout the pandemic. The weak return-to-office rate has led to soaring vacancy levels in many cities. Last year’s spike in interest rates increased the cost of buying and refinancing properties and squeezed property values.

Until now, most landlords have been able to stay current on their mortgages because office leases typically run for 10 years or more and lenders have been willing to extend expiring mortgages. “Commercial real estate markets are currently in a recession,” said Owen Thomas, chief executive of Boston Properties Inc., one of the country’s largest office building owners, on an earnings call earlier this month.

Landlords are taking some comfort that the highest quality office space in good locations still attracts demand. Some also predict that an economic downturn would empower managers to insist that employees work in the office.

But hardly anyone is suggesting that office usage will return to its pre-pandemic rate. Indeed, in a soon-to-be-released report, commercial real estate services firm Cushman & Wakefield PLC is projecting that the U.S. will end the decade with a record 1.1 billion square feet of vacant space, compared with 688 million square feet in 2019. 

Has the economy changed so much that the old ways of doing things (big offices, big leases) just don’t work anymore?  Well, you can be sure that many of these matters will end up in a courtroom because disputes are EVERYWHERE. And when those things negatively impact YOU and/or YOUR business including bankruptcies, landlord/tenant matters including unlawful detainers, contract issues, nuisance ADA claims and even collections, call in your good guy business litigator, Dean Sperling to resolve YOUR matter with YOUR best interests in mind! 

More on the case:

Wall Street Journal Story