A growing number of office landlords are defaulting on loan payments as the rise of remote work causes more corporate tenants to rethink long-term leases, according to a report Tuesday.
The delinquency rate on office loans increased by a quarter percentage point to 1.83% last month, the Wall Street Journal reported, citing data from research firm Trepp Inc. While the number is still relatively low, the increase was the sharpest of its kind since December 2021.
Vacant office space throughout the US is expected to surge to an unprecedented 1.1 billion square feet by the end of this decade — up from 688 million square feet in 2019 before the COVID-19 pandemic drove a widespread adoption of remote work, according to data from real estate firm Cushman Wakefield PLC cited in the report.
“The economy built all this office space for a workforce that was going into the office most of the time,” Cushman chief economist Kevin Thorpe told the outlet. “Most businesses simply don’t need as much office space as they had before.”
The shift away from traditional offices has impacted major firms. Brookfield Asset Management recently disclosed a default on more than $70 million in debt on two office towers in Los Angeles.
In Manhattan, real estate firm RXR is reportedly working with creditors to restructure debt on its office building at 61 Broadway. Last year, Blackstone Group, one of the Big Apple’s biggest landlords, handed the keys to 1740 Broadway back to its lenders while transferring a $308 million loan on its office building to a special servicer.
Corporate landlords are losing tenants even as a recent surge in interest rates makes it more expensive to buy or refinance properties.
The problem could get worse in the months ahead. Each month, an additional five to 10 office buildings are added to the list of properties at risk of a default on debt obligations — with low occupancy a chief cause, Trepp senior managing director Manus Clancy told the Journal.
Many US companies have adopted a hybrid schedule as part of their return-to-office pushes, with employees expected to work on-site anywhere from two to four days a week. Some firms, such as Airbnb, have gone fully remote, while others, such as Goldman Sachs, have pushed staffers to return to the office five days a week.
Last week, Bloomberg reported that remote work was expected to cost Manhattan $12.4 billion per year in lost revenue from worker spending.