Evelyn Jozsa Key Takeaways:
- Manhattan leads the nation’s top markets with $56.7 billion in office loans due by the end of 2026
- More than $46.9 billion of Manhattan Class A office loans are due by the end of 2026
- Manhattan also has the largest volume of maturing debt on Class B/C offices across the U.S., with $9.72 billion in loans due over the next three years
- Nationwide, office debt totaled $920 billion across the U.S. in October 2023
- Across the U.S., 32.7% of office loans are set to mature by the end of 2026
The challenges faced by the U.S. office sector are becoming increasingly more pronounced: According to a recent analysis by CommercialEdge, the commercial real estate data research division of Yardi, almost $150 billion in office building mortgages are set to mature by the end of 2024, with an even greater amount ($300 billion) set to mature by the end of 2026.
Furthermore, an in-depth examination of more than 80,000 office properties accounting for $920 billion in mortgage debt revealed a concerning trend: Approximately 16.1% of loans by dollar volume are set to mature by the end of 2024, and this number is expected to rise to 32.7% by the end of 2026.
Notably, the center of this looming crisis is Manhattan, which leads the nation in distressed office properties, although the root causes of this distress are multifaceted. Of course, the rise of remote work has certainly prompted companies to reassess their space requirements, especially in primary office markets with traditionally lengthy commutes.
Manhattan Leads U.S. in Maturing Office Debt by Dollar Volume
The national office vacancy rate surged to 17.8% in October 2023 — a stark 120 basis points increase year-over-year and a significant jump from the 13.4% pre-pandemic rate in January 2020 — and some of the most significant increases in vacancy rates were recorded in core office markets, such as Manhattan. For example, at the beginning of the pandemic, the market’s vacancy rate stood at 7.9%, whereas it had 17.7% of its office space available for lease this October.
Granted, the paradigm shift toward remote work has given tenants increased leverage and led to renegotiations for favorable terms, such as shorter leases and landlords financing renovations for enhanced amenities. However, this trend — coupled with rising costs and decreasing property values — creates a challenging environment for office owners. That’s because, as of October, CommercialEdge identified 1,159 office properties in Manhattan, out of which 136 hold $19.8 billion in loans that are set to mature by the end of 2024. That was nearly double the figures of the next-highest metro, Los Angeles, which faces $10.3 billion in maturing loans during the same period.
Looking further ahead, Manhattan’s office market is facing an even gloomier outlook: A significant 32.5% of its total office mortgage volume — which amounts to $56.7 billion — is set to mature by the end of 2026. In comparison, the next two metros with the highest percentages of maturing loans — Los Angeles ($21.6 billion) and Chicago ($17.9 billion) — have less than half of Manhattan’s volume.
Manhattan Has Largest Volume of Maturing Class A & B Office Loans Through 2026
What’s more, the allure of prime locations, cutting-edge infrastructure, and proximity to key economic centers has consistently positioned Manhattan as a preferred destination for top-tier businesses, thereby contributing to the prevalence of high-quality assets in the market. As such, it’s not surprising that more than three quarters ($46.96 billion) of the maturing loans in Manhattan by the end of 2026 are backed by assets rated Class A+/A.
Even so, Manhattan also leads the nation in maturing Class B and C office loans with $9.72 billion loans due by the end of 2026. Moreover, amid the ongoing flight-to-quality trend, Class B and C assets might face more difficulties when it comes to refinancing loans.
Additionally, real estate analysts anticipate that older structures with outdated layouts — particularly those dating back a decade — may need help attracting interest from most companies and will need to find other uses. Consequently, many of these buildings will be converted into housing. To that end, a report published by the National Bureau of Economic Research revealed that about 10% to 15% of office space in the U.S. was suitable for residential conversion, which could create 171,470 additional housing units across the country, including nearly 40,000 in New York City.
Yet, some assets might find a silver lining amid the ongoing economic headwinds because buildings constructed before 2000 that are also larger than 250,000 square feet are eligible for a tax break through the Manhattan Commercial Revitalization Program. This program allows landlords to avoid property taxes on the value of the renovations for up to 20 years.
Market Distress Influenced by Various Factors
Although Manhattan leads the nation in maturing office debt, the potential for defaults is not solely tied to volume as it’s also influenced by market performance. Accordingly, overbuilt markets with weakened demand due to the pandemic — such as Houston (24.9% vacancy rate as of October 2023 and 47.1% of loan volume maturing), San Francisco (24.2% vacancy rate with 30.1% of volume maturing) and Atlanta (18.7% vacancy rate and 49.1% of volume maturing) — are at higher risk of defaults due to a combination of high vacancy rates and a large number of maturing loans.
Nonetheless, as the U.S. grapples with this unfolding scenario, Manhattan stands at the forefront of growing distress in the office property market, signaling potential challenges that extend beyond 2026. Of course, the future trajectory will depend on various factors, including interest rate increases, market performance and the duration of elevated rates. However, the looming crisis emphasizes the need for strategic and adaptive measures to navigate these unprecedented challenges in the Manhattan office space landscape.
Note: CommercialEdge and PropertyShark are both part of the network of Yardi Companies and Affiliates.
