There have been two camps on the immediate future of office properties. One — the larger it seems — say the pain will continue. The other sees better times, at least if the office is a Class-A or trophy.
Put Morgan Stanley into the first camp. In a recent note from the bank, according to Business Insider, which got a copy, analysts said that U.S. office buildings are facing a total 30% valuation drop from peak values. That drop would include the 20% down from peak already experienced, according to data Morgan Stanley credited to Real Capital Analytics.
Not that office is the only one dealing with problems. Morgan Stanley also addressed the elephant that’s filling the room to such a degree that people are absolutely talking about it: $2 trillion worth of maturity wave in the next few years.
But as Colliers U.S. CEO Gil Borok recently said, “There’s no question that there’s going to be distress coming. The signs are all there. But I also think that we will see banks and other lenders continue to work with borrowers to work through the situation and we’ve seen that historically. The sort of doom and gloom out there, it’s not to make light of it, but it is to say that there are pathways that will be less drastic than what we are hearing in the media today.”
That banks and other lenders will go to extreme lengths to avoid having massive defaults sitting on their balance sheets seems an easy call. What lengths and how much could be head off are the questions.
While that leaves things in question for much of CRE, office still remains a major problem that is up in the air. The “secular” problems facing the property type — to what degree workers will return and how easily employers could make them — are serious issues. Employees who do come into the office may not be there for full five-day weeks. That’s an issue.
The changes have already taken a toll. “Delinquency rates jumped to 6.5 percent of balances for loans backed by office properties and to 6.1 percent for lodging-backed loans,” said the Mortgage Bankers Association in a report. Retail-backed loan delinquencies were elevated but unchanged during the quarter. Multifamily and industrial delinquencies were up a touch. Office is where the dynamics are most strained.
“We are unlikely to see demand for office properties returning to pre-pandemic levels,” Morgan Stanley wrote. “This means that property valuations, leasing arrangements, and financing structures must adjust to the post-pandemic realities of office work. This shift has begun and there is more to come.”
