Finance  ·  Leases

Loans Coming Due, Lease Expirations Spell Trouble for Office Market: Report


A combination of loans coming due this year and large office leases expiring within the next two years could spell trouble for many office building owners in New York City, a report from Trepp and Compstak warns. 

Fixed-rate loans on office buildings coming due in 2023 “are maturing at what could end up being the peak of the [Federal Reserve’s] current tightening cycle; as a result, the loan interest rate will be significantly higher,” Trepp’s analysts wrote. “The interest rate sticker shock, combined with the possibility of a recession, could translate into an extremely challenging environment for these borrowers. The debt service burden for many of these loans will likely increase 40 to 60 percent.” 

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In other words, a combination of mortgages coming due, high office vacancy and rising interest rates may result in more office landlords being forced to hand back the keys to their buildings to lenders. Indeed, RXR recently told Commercial Observer that it was reconsidering the future of two of its office buildings.

“We need [the banks] to cooperate to enable us to do that in a way that makes sense,” said RXR CEO Scott Rechler. “Some buildings aren’t going to come back to be competitive as office buildings, so you need to think of what the alternative is.”

The Trepp analysis, which covers 11 major office markets in the U.S., notes that fixed-rate loans maturing in 2023 account for $6.25 billion, or 15 percent, of the loans maturing in the next two years. Landlords with fixed-rate loans likely have lower interest rates, meaning that they’ll suffer more sticker shock when they try to refinance amid today’s higher rates. Roughly $40.5 billion worth of all office loans examined in the Trepp analysis are expected to mature by the end of 2024, consisting of 353 loans backed by 583 office properties. 

“We’re facing this wall of office loan maturities and lease expirations,” said Stephen Buschbom, Trepp’s head of research. “So that leaves a big ‘to be determined.’” 

In New York City, office landlords have 89 loans backed by 129 properties expiring by the end of 2024. They owe $15.7 billion to lenders. Among these buildings, the average owner has one of its top five largest tenants — occupying 48,275 square feet on average — with a lease expiring in the next two years. These landlords also have, on average, about 17 percent of their office leases expiring in the next two years. 

“If your loan is maturing in 2023, you’re going to need some resolution around whether or not the tenant is going to renew or whether they’re downsizing,” said Buschbom. “You’re either losing some tenants or they’re renewing at lower rents. You’re being squeezed both in terms of revenue and debt service.”

The other major office markets in the country are seeing similar trends, though some are worse off than New York. San Francisco, for example, has seen negative rent growth across all kinds of office buildings, with Class B net effective rents dropping nearly 18 percent since 2019. Class A office rents in New York have grown about 2 percent over the past three years, and Class B rents have ticked up just 0.2 percent. 

Class B buildings, across the board, are much more likely to be struggling, according to Trepp. Average lease terms for tenants renewing or extending in Class B buildings dipped to less than four years in 2020, and that figure remains 11 percent below 2019 levels. New tenants are also signing on to slightly shorter terms in these older, less renovated properties, with overall lease terms in 2022 shrinking by about 8 percent — to five years — compared to 2019. 

Rebecca Baird-Remba can be reached at