Finance  ·  CMBS

Charles Schwab Office Downsizing Poses Limited Threat to CMBS Deals: Barclays

Lack of termination option at impacted properties keeps near-term damage muted but could spell trouble for future office deals.

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An Aug. 21 regulatory filing from Charles Schwab detailing plans to downsize its real estate footprint marks the latest headwinds to confront the office market, but the lack of termination options at the affected properties may make the short-term damage largely muted, according to a new analysis from Barclays (BCS).

While Schwab did not detail what specific offices it will close, a company memo in July noted plans to shutter offices in Atlanta, San Antonio, San Diego, St. Louis and Tampa while also reducing its footprint in Boston, Chicago, San Francisco, Jersey City and Henderson, Nev. 

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The Chicago, San Francisco and Jersey City Schwab offices all secure commercial mortgage-backed securities (CMBS) debt, but none of those locations has termination options, according to the Barclays report. 

Charles Schwab does have a termination option for its Orlando property, but the Florida city was not one of the markets targeted for cutting office space, Barclays analysts Lea Overby and Anuj Jain wrote. 

The lack of a termination option in cities where Schwab plans to cut its office space therefore indicates “near-term performance may not be affected,” according to Overby and Jain.

In an interview Tuesday, Jain told Commercial Observer that while the near-term impact to the affected CMBS properties will be small, news of companies like Charles Schwab significantly cutting office space will negatively affect investor demand for other office deals. 

“The more this kind of news comes out, it becomes more challenging to have office in new issuance [CMBS] deals,” Jain said. “It’s going to be a slow burn because when you get news like this you have to see what happens in the next three years and five years and seven years. It’s like watching the paint dry.” 

Of the locations where Charles Schwab plans to reduce headcount, its Jersey City office at 70 Hudson Street has the longest remaining lease, running until June 2033, according to Barclays. Schwab’s San Francisco lease expires in April 2028, and the Chicago lease expires December 2027, the Barclays research shows.  

For its Orlando Maitland Office Portfolio property, Charles Schwab has a lease that runs until February 2026 for the entire 124,934 square feet of Summit Park II. At the time of the CMBS origination, the lease ran until July 31, 2020, with two five-year renewal options.

Andrew Coen can be reached at acoen@commercialobserver.com