Commercial Tenants Beware: 5 Cities With the Most Maturing Office Loans

 In this article, you'll learn:

• Which cities are most affected by maturing office loans.
• How high vacancy rates and economic uncertainty impact office markets.
• The risks tenants face from potential landlord defaults.
• Opportunities for tenants to negotiate better lease deals amid market challenges.

With this in mind, it’s predicted that more commercial property owners than ever are set to hand back their keys (honestly, it’s already happening). But, the situation is more dire in some regions than it is than others.

If we zoom in to look at the performance of the office market on a national level, we can identify both opportunities and potential red flags to avoid. Because “Commercial Edge reports, that in the next three years, 9,500 buildings, or about 17% of all office stock, will be up for renewal. The amount of space with loans maturing over the next three years will hold at about 380 million square feet.”

This places tenants in a tricky position. While they can benefit from the leverage of record availability to drive incredible deals, it’s uncertain how these deals will be upheld when so many property owners are struggling. Right now, there’s a minefield of potential landlord defaults as there’s a 1 in 3 chance that your landlord has to hand back the keys.

So corporate tenants need to be more careful than ever about where they choose to sign or renew leases. Because the areas with the most approaching office loan maturation are likely set to have more distress and sooner.

In this article, we will cover which top metropolitan regions are marked by the most trouble on the horizon.

1. Atlanta, GA

Atlanta has exploded in popularity in the CRE sector in recent years. But, is it burning out just as quickly as it started gaining traction?

Atlanta saw 14% population growth in the past decade, making it one of the nation’s primary markets to pay attention to. On top of this, it jumped five spots this year to be named the third best city for real estate by the Urban Land Institute. And with a $5 billion, 50-acre mixed use development in pursuit to host the World Cup, Atlanta’s star was set to rise even further.

But, even before the development broke ground there was trouble on the horizon signaling that Atlanta could not uphold its rapid expansion. According to GlobeST, the Atlanta market “had 2.1 million square feet of deliveries while another 3.2 million square feet is under construction at a time when the office vacancy rate has hit 17%.” 

In fact, the the city always deliberately planned to build the office space after the other developments to avoid a glut of available office space. Atlanta property owners are still competing for tenants and will only get more competitive once an additional multi-million square feet becomes available on the market.

According to the Business Journals, “More than 10% of Atlanta’s office stock have loans maturing in 2023.” This is significant but if we look slightly further out on the horizon, the story gets a bit worse. By the end of 2025, 29.1% of office loans in Atlanta are set to mature.

Only time will tell how much trouble is coming for Atlanta's office market. 

2. Portland, OR

Unfortunately for Portland, there’s not a lot of good news to start off with. So, let’s just jump into the trouble.

This marks the worst performing quarter since the beginning of the pandemic. It’s also representative of a steady and prolonged downturn, specifically in Portland’s central business district.

Office tenants are largely unwilling to sign long-term leases. Landlords in the city have taken a hit as tenants are overwhelmingly looking for short-term commitments, averaging around the three-year mark. On top of that, tenants are pushing for more flexible terms and lower rates.

Now, 27.5% of office loans are set to mature by 2025 with over 10%, up by the end of this year, further fueling uncertainties from investors and property owners. Because on top of this, 22% of space in the greater Portland office market is already listed for lease, compounded by the market’s high inventory of sublease space.

The positive side if all this is that tenants are being encouraged to use these numbers to drive competitive deals and low rates.

3. Denver, CO

Denver’s office market is putting up a fight, but still getting knocked down by economic uncertainty and high vacancy rates.

By 2025, 24.3% of office loans will have matured. As loans mature and property owners face higher interest rates, the risk of loan defaults increases. This fuels to a nasty, negative feedback loop where defaults lead to foreclosures, a potential increase in vacant office spaces and a further decline in property values.

Some of Denver’s largest employers are reducing their footprints or taking steps to do so in the future. And until the recession symptoms alleviate it’s not predicted that this trend will slow. Hybrid and remote work is proving to be one of the biggest money-saving tactics companies have in their pockets right now. Of course this has stunted the demand for space across the country, and Denver is especially feeling this pain. 

4. Chicago, IL

It’s not necessarily a surprise that Chicago appears on this list. The circumstances in Chicago and Illinois in general have pushed away many of its businesses already. An already-complicated regulatory environment coupled with rising crime and high taxes are not necessarily notable of an area where businesses can make money.

In the last year, Illinois lost 3 of its 35 Fortune 500 companies. Citadel, Boeing, and Caterpillar. On top of this, tech giants Meta and Salesforce put up a combined 240,000 square feet for sublease in March, further throwing fuel on the fire on an already record amount of available space on the market.

Now as 23.0% of office loans are set to mature in the next two years, things may get worse.

Chicago is being largely left behind in the “flight to quality.” Tenants still looking for office space want premium features and amenities that encourage employees to come into the office. And on the losing end, “More than 70% of office buildings in markets such as New York, San Francisco, Los Angeles, Boston, Chicago and Philadelphia are at least three decades old,” according to CoStar. 

The city is prepared to go to great lengths to rectify the situation which seems to get bleaker by the minute. The latest suggestion sponsored by Mayor Lightfoot involves “soliciting proposals to convert some office buildings in the financial center on and around LaSalle Street into affordable apartments.”

While this is not necessarily a new concept, it is more complicated in practice. Read about The Push to Convert Empty Offices into Housing. Will it Work? 

5. Los Angeles, CA

Leasing activity in the first quarter of 2023 was down 37% from this time last year. The office availability rate has reached its highest threshold recorded and the sum of vacant, soon-to-be-vacant and available sublease space is now up to 26.2%.

Record poor activity is highlighted by the now looming 21.5% of office loans maturing by 2025.

Brookfield's Defaulted 777 Tower 

“Los Angeles is another market with a wall of office maturities on the horizon — more than 7% of the metro’s office stock is subject to a maturing loan this year, and Brookfield’s default on $784 million in loans on two office towers in downtown L.A. hints at what’s next for office owners,“ according to the Commercial Edge. 

The city has been hit harshly bey rising inflation, interest rates, and new legislature like the Transfer Tax which levies a 4% tax on all residential and commercial sales that trade above $5 million and 5.5% on all sales above $10 million 

All this economic uncertainty and expensive red tape is sure to further tie up the office market in 2023 and beyond.

Cities with the Most Maturing Office Loans

The commercial real estate market is obviously facing significant challenges as a large number of office loans are set to mature in the coming years. Cities such as Atlanta, Portland, Denver, Chicago, and Los Angeles are experiencing high vacancy rates, declining leasing activity, and economic uncertainty.

But it doesn’t end with that list. Honorable mentions for other hubs with high approaching office maturation are:

• Washington, D.C. (20.4% of office loans set to mature by 2025)
• Austin (20.0% of office loans set to mature by 2025)
• Dallas-Fort Worth (20.0% of office loans set to mature by 2025)

Maturing office loans doesn’t spell out the potential end of a market, but does fly up as another red flag for tenants looking for reliable, long-term success in their commercial real estate.

Tenants must tread carefully when signing or renewing leases, as the risk of landlord defaults is growing. However, this situation also presents opportunities for tenants to negotiate favorable deals and lower rates. As we move forward, it is crucial for property owners, investors, and tenants to closely monitor the evolving market dynamics and adapt their strategies accordingly. The commercial real estate landscape is shifting, and those who are able to navigate these challenges successfully will emerge stronger in the long run.

So don't just wait around helplessly, learn more about the evolving situation and what action tenants can take going forward: 

4 Ways Commercial Tenants Can Protect Themselves from the Office Apocalypse

2009 or 2023? Beware Your Landlord's Default Risk

Which Types of Offices and Markets Will Survive?