A major threat to the health of the American economy is on the horizon, as billions of dollars in loans for office buildings will soon be due.
The Mortgage Bankers Association said this week that a large segment of the nearly $117 billion of mortgages on office buildings could default this year. When the mortgages come due, borrowers have the choice of either repaying them in full or refinancing them — which could prove to be not economically feasible with interest rates as high as they are.
The MBA reported that this unfortunate situation could cause both real estate developers and financial institutions that loaned money to them to become insolvent. In turn, it could end up sparking a wider recession in the U.S.
A Daily Mail report cited economists who said that 40% of mortgages on office buildings were “underwater,” meaning that the borrowers owed more money than the current value of the property.
Should borrowers not be able to repay or refinance them when they come due, the financial institutions that extended the credit would be forced to incur major losses. And that might be too much for small- and medium-sized regional banks to handle.
According to Moody’s Analytics, about 224 of the total 605 mortgages on office buildings that are expiring in the near future could prove tough to refinance or repay. The main reasons for this are either that the buildings themselves aren’t turning enough of a profit, or the owners have taken on too much debt.
US office occupancy rates are set to fall through 2024, reflecting corporate downsizing and work from home. Office building revenues will drop, creating default risk for loans underlying commercial mortgage-backed securities. 👉 See more on CMBS: https://t.co/ck6Sg3W5uE pic.twitter.com/P6dAEWCNXl
— Moody's Investors Service (@MoodysInvSvc) March 24, 2023
Many of the building owners took out the initial mortgages when interest rates were at least half of what they are now, making refinancing difficult. Plus, the COVID-19 pandemic dealt a significant blow to the office building market, with so many people being forced to work from home and then allowed to continue working remotely.
A report in the Financial Times outlined a prime example of this — the Seagram building in New York City. When the building was mortgaged in 2012 for $760 million, the lender assumed it would bring in annual revenue of $74 million.
The reality, though, is that its best year since was 2018, which resulted in $69 million in revenue. And last year, the building generated only $27 million in revenue.