Now that pandemic-induced trends of hybrid and remote work have forever changed the office landscape, more and more landlords of major office developments are defaulting on their property loans. Each month, five to ten office towers are added to the list of properties at risk of default due to upcoming lease expirations, low occupancy, or maturing debt that would need to be refinanced at a higher interest rate. Some big institutional players with properties that have landed on the default list include Brookfield Asset Management, who recently defaulted on more than $750 million in debt thanks to two 52-story towers in Los Angeles.
Until recently, most landlords have been able to stay current on their mortgages because office leases often run for 10 years or more and lenders have been willing to extend expiring mortgages. Nonetheless, during the epidemic, worries about the state of the office building industry have grown. The dismal return-to-office rate has contributed to growing vacancy numbers in numerous locations. The rise in interest rates last year pushed up the cost of refinancing existing loans and decreased the value of real estate.
Losing properties to creditors following a default would be distressing but not disastrous for the majority of landlords. Creditors typically have the right to foreclose on the building in the event of debt default, but not the rest of the business. Yet the effects of foreclosures are probably going to be seen throughout the banking sector. At the conclusion of the third quarter of 2022, office buildings were used to support about $1.2 trillion in debt.