Office Owners on ‘Borrowed Time’ As Maturities Loom

A view of the Manhattan Skyline with the Empire State Building in the center.
Roy Rochlin/Getty Images

  • Many troubled office loans have been extended or modified as owners face difficulties. 
  • The trend can’t continue though, and debt maturities are looming, Goldman Sachs says. 
  • Analysts at the bank said many office mortgages are “living on borrowed time.”

The pandemic ushered in a work-from-home boom that doesn’t look like it’s going away, and that’s put huge stress on the office segment of the US commercial property market. 

Landlords for those properties have been staring down a huge wall of debt maturities, leading to a historic amount of debt being extended or modified, rather than refinanced. In a note Tuesday, Goldman Sachs cautioned that office mortgages as a result are “living on borrowed time.”

The amount of outstanding commercial mortgages set to mature by the end of the year has hit $929 billion, up from $658 billion at the start of 2023, according to data from the Mortgage Bankers Association. Of the $270 billion spike, banks hold $114 billion and non-bank entities are responsible for the rest.

“The primary driver of this material increase has been the willingness of lenders and borrowers to modify and extend maturing loans rather than refinancing or forcing a foreclosure,” Goldman strategists said. “Put another way, a decent portion of the loans that were set to mature last year were modified and extended to 2024. Unsurprisingly, office loans have benefited disproportionately from modifications.”

Even though the trend of extending maturity dates and modifying loan terms has helped mitigate the number of defaults, Goldman said it’s unlikely that funding costs will return to pre-pandemic levels, which could spell financial catastrophe for offices. 

To that point, data from CMBS — bonds backed by bundles of commercial mortgages — suggest the share of office loans that have been fully paid off at maturity has dipped below 60%, the strategists said. Meanwhile, the maturity payoff rate for loans on other types of properties remains near the highs of the last decade. 

Borrowers on weak footing will soon be unable to refinance, Goldman forecasted, as the costs of refinancing existing commercial mortgage loans are at two-decade highs. 

The costs have climbed as office property values have crashed. In February, Canada’s largest pension fund sold a stake in a New York City building for a single dollar, an extreme example of the dire value proposition for many office buildings struggle with lower occupancy. 

Goldman strategists highlighted that CMBS markets have shown an uptick in losses on maturing loans following a relatively muted 2023.

Maturity defaults have seen a recent uptick following a relatively calm 2023.
Goldman Sachs

“We expect the wave of modifications to persist in the near term as refinancing stays uneconomical for most commercial real estate borrowers, while foreclosures remain an unappealing proposition for lenders in an illiquid property market,” the strategists maintained. “That said, the risks of this trend breaking have undoubtedly risen.”

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