High interest rates are putting pressure on office landlords nationwide.
Atlanta-based Piedmont Office Realty Trust Inc., a major office landlord in the Dallas area, is finding itself in a tough spot after announcing a $400 million debt deal that could find the REIT paying tens of millions more in annual interest, the Dallas Morning News reported.
Piedmont owns more than 50 office properties in seven major U.S. metro areas, with many of them in North Texas, including more than a dozen office buildings and the three Galleria office towers acquired in 2020.
The new $400 million note offering carries a high interest rate of 9.25 percent, more than doubling the lower-interest 4.45 percent senior notes it’s replacing and are due next year. As a result, Piedmont’s interest expenses are expected to increase by nearly $20 million, potentially exceeding its pre-tax profit by the end of the year, according to analysts’ estimates reported by Reuters.
“It is unfortunately reflective of where the market currently is for commercial office properties,” Piedmont CEO Brent Smith said in a conference call with investors and analysts, according to the Dallas Morning News. “There is a large wall of commercial debt coming due the remainder of this year and next year and thinking about that overall implication and available funds, there’s a lot of basically need and not a lot of supply.”
The company’s stock price has fallen 45 percent over the past year, and it’s lost $2 million in the most recent quarter.
Piedmont’s office holdings extend beyond Dallas, including properties in Atlanta, Boston, Minneapolis, Orlando, and the Washington, D.C., area, with about 86 percent percent of its nearly 17 million square feet of offices leased.
The office market has been hit hard since the pandemic, experiencing declining leasing and building occupancies. In DFW, office vacancies have reached over 27 percent, the highest rate in over two decades, according to the outlet.
Adding to the challenges, there is an estimated $10 billion in commercial mortgage-backed securities debt on DFW properties due in the next two years, and some property owners are handing back buildings to lenders due to skyrocketing mortgage payments.
— Ted Glanzer