Why aren’t there any forced sellers if offices are in such a mess?

The COVID-19 outbreak emptied many office buildings in early 2020, putting pressure on their owners. Colliers, a realty consultancy business, reports that the U.S. vacancy rate is 17% as of today, up from 11% in late 2019—the highest level since the global financial crisis of 2008.

Surprisingly, though, forced sales do occur. Based on study by MSCI Real Assets, only 3.5% of all office acquisitions in the US in 2023 involved a distressed seller. According to the latest data, the share fell to 2.7% in January. At the GFC, distressed sales increased at a far quicker rate.

Most renters are still making their rent payments, which is helping to put off the day of reckoning thanks to the robust economy. Slowly but surely, pressure is mounting as leases expire, and many businesses are cutting back on space by 30–40% as a result.

Lenders are also keen to put the problem off until the future. The commercial real estate market is now sluggish, and they do not want to punish borrowers by forcing them to sell their buildings at a loss.

This could be the reason why debt maturities aren’t causing the kind of trouble that some people who keep tabs on the real estate market were expecting. According to statistics from real-estate analytics firm CRED iQ, only 25% of the $35.8 billion in office loans that matured last year in the commercial mortgage-backed securities market were fully repaid. A third party, known as a special servicer, attempts to determine the best conclusion for the debt by extending or sending other loans to them. This outcome could be a modification of payment arrangements or even foreclosure.

Distressed transactions are taking longer than they would have during the 2008 crisis because of the increased complexity of office financing. Getting all of the lenders to agree to sell or foreclose on a property becomes more difficult as the number of lenders increases, particularly on large buildings held by institutional investors.

For example, according to CRED iQ data, lenders have only realized a loss on five out of the approximately 600 failed CMBS office loans that were referred to a special servicer in the last two years. The properties in question were sold off after going into foreclosure in these instances.

A slew of unscrupulous financiers have emerged with loan proposals. In a blind-pool IPO, Reven Capital is aiming to raise $1 billion for a distressed lender with an emphasis on office space. For offices, it’s 1929, according to Reven’s creator Chad Carpenter. Since banks are pulling back, he believes distressed-debt funds can lend at very advantageous terms.

Landlord SL Green Realty of Manhattan, along with Blackstone, Brookfield, Cohen & Steers, and others, is optimistic on distressed real estate loans. The irony is that some of Blackstone and Brookfield’s offices are being returned at the same time by both firms.

While distressed-debt investors may temporarily alleviate some forced sales, the demand for financing in the office sector will quickly surpass availability. There will be a refinancing gap of $72.7 billion for American office owners, according to CBRE, from now until the end of 2025.

Another possible indicator of wishful thinking is the absence of distressed sales. Borrowers and lenders alike may be hoping for interest rate reductions; with cheaper debt, they may not have to take as big of a hit when selling. Some office demand may also return, which is a source of optimism. According to MSCI Real Assets statistics, the value of offices bought in 2021 was the second-highest since 2008—a far cry from when remote work was thought to be a passing trend.

However, waiting comes with a price. Insuring and maintaining offices that may become outdated is costly. Office values have already dropped 35% and will fall much more when a deluge of distressed assets hits the market.

Based on the geographical choices made by investors, office space will represent “the buying opportunity of our generation,” according to Mike McDonald, a senior managing director at real-estate firm JLL. Among the first groups of investors preparing to purchase inexpensive buildings are local real estate developers and extremely rich families.

It appears like a deluge of “For Sale” signs is on the way, but they’re taking longer than anticipated to come.