Even buildings with low vacancy rates and steady rental incomes are feeling the sting of a fickle economy.
About 100 seemingly healthy office properties backed by CMBS loans are in some stage of distress, the Commercial Observer reported. That’s about 5 percent of the approximately 2,000 properties nationwide with 85 percent occupancy rates studied by Trepp’s David Wegman.
“This is not a normal market occurrence,” Wegman told the publication. “If a property is performing in terms of occupancy and rent collection, then normally this is not an issue.”
One reason is the drop in valuations plaguing the office sector since the pandemic. About half the 100 properties singled out by Wegman are trying to refinance loans that have matured. As values drop, lenders are doling out less cash.
Higher interest rates also play a role. That was the case at Metro Loft’s office-to-resi conversion at 180 Water Street, which failed to pay off the $265 million CMBS loan at its November 2024 maturity even though it was 98 percent occupied five months earlier.
Another Metro Loft conversion at 20 Broad Street was sent to special servicing last August, despite a 98 percent occupancy rate.
“When you borrowed money five years ago at 3 percent and now need to pay 6.25 or 6.5 percent in interest to refinance, what do you think is happening to that building?” Metro Loft’s Nathan Berman told the Observer.
Some of the buildings have also accrued years of unpaid interest over multiple workouts and restructurings.
RFR’s 285 Madison was recently seized by one of its lenders after landing in special. The developer still couldn’t make things work despite the building being 96 percent leased and pulling nearly three times as much revenue as expenses.
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