The COVID-19 pandemic reshaped the way we work, triggering a surge in remote work arrangements. As a result, the office sector of the US commercial property market has been under significant pressure. Landlords are grappling with a daunting wave of debt maturities, leading to a record amount of debt being extended or modified rather than refinanced. Goldman Sachs recently cautioned that office mortgages are "living on borrowed time."
With outstanding commercial mortgages set to mature by the year-end hitting a staggering $929 billion, savvy investors are eyeing the potential opportunities arising from defaults on commercial loans. Banks hold $114 billion of this total, while non-bank entities account for the remainder. The significant increase in maturing loans has been primarily driven by lenders and borrowers opting to modify and extend loan terms rather than pursuing refinancing or foreclosure. This trend has disproportionately benefited office loans, offering a window for investors to explore distressed asset acquisitions.
Despite these efforts to delay defaults, Goldman warns that funding costs are unlikely to revert to pre-pandemic levels, potentially posing financial challenges for office properties. Data from CMBS indicate that the percentage of office loans fully paid off at maturity has fallen below 60%, contrasting with other property types where maturity payoff rates remain near decade-high levels.
As office property values plummet, the costs of refinancing existing commercial mortgage loans have soared to two-decade highs. This trend, coupled with declining property values, paints a grim picture for many office buildings, with some experiencing rock-bottom occupancy rates. For investors seeking deals, this presents an opportunity to capitalize on distressed assets and negotiate favorable terms amid market uncertainty.
Goldman analysts anticipate a continued wave of loan modifications in the near term, driven by the economic challenges facing commercial real estate borrowers. However, they caution that the risks associated with this trend are on the rise, signaling a potential shift in the market landscape.
To find opportunistic deals on office buildings where loans are in default or nearing default, investors can employ several strategies:
1. Stay informed: Keep abreast of market trends, foreclosure notices, and distressed property listings to identify potential investment opportunities.
2. Network with lenders: Establish relationships with lenders who may be looking to offload distressed assets or negotiate loan modifications.
3. Conduct thorough due diligence: Assess the financial health and occupancy rates of target properties to gauge their investment viability.
4. Seek creative financing options: Explore alternative financing sources, such as private equity firms or distressed asset funds, to fund acquisitions.
5. Be patient and persistent: Navigating the distressed property market requires patience and persistence. Stay focused on long-term investment goals and be prepared to act swiftly when opportunities arise.
6. Consult with CRE professionals with market expertise that have knowledge of commercial office buildings where landlords are struggling to make new lease transactions.
Written by Jamal Brown
