Next crisis in the office market: a wave of lease expirations

With the office market teetering on the brink, landlords are bracing for a surge in vacancies this year.

JLL data shows about 243 million square feet of office leases are set to expire nationwide in 2022, The Wall Street Journal reported. The figure is a 40% increase from 2018 and the highest since JLL began tracking it in 2015, accounting for around 11% of the nation’s leased office space.

The volume of lease expirations is also expected to exceed 200 million square feet in each of the next three years, which could only be the beginning, given that Green Street has estimated a 15% decline in office demand.

The surge is preceded by tenants negotiating shorter-than-usual lease extensions while landlords weather the storm. Brokers told the Journal that as more companies face the reality of a hybrid work environment, they are looking for smaller spaces.

This is bad news for office landlords, who have been able to avoid the worst of the pandemic by continuing to collect rents whether or not tenants’ employees are in the office.

“I don’t think the owners have felt the pain yet,” Savills vice president Jeffrey Peck told the Journal. “Now they will start to feel the pain.”

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Homeowners won’t be the only ones to suffer. Banks and other lenders may also face more problematic lending if office properties begin to underperform due to vacancies.

Barclays reported in February that 21.2% of office loans made after the recession package in CMBS deals were either with special servicers or on watch lists, the highest level in more than a decade. Trepp reports that about $1.1 trillion in loans secured by office buildings are already outstanding, while another $320 billion in loans will mature over the next two years.

Last month, Blackstone handed over the keys at his Midtown office building at 1740 Broadway. A $308 million loan was transferred to special service, which typically results in the repairer acquiring title through a deed in lieu of foreclosure. Blackstone is looking for loan resolution options, saying “the asset faces a unique set of challenges.”

The national vacancy rate is already 12.2%, the highest in the pandemic, according to CoStar data reported by the Journal. It is up from 9.6% at the end of 2019.

Jose C. Birney