America’s Office Fire Sale Has Barely Begun

If offices are in such hot water, where are all the forced sellers?

Office-building owners have been under pressure since the Covid-19 pandemic hollowed out their buildings in early 2020. According to data from real-estate consulting firm Colliers, the U.S. vacancy rate has risen from 11% in late 2019 to 17% today, higher than at any point in the 2008 global financial crisis.

But forced sales are still surprisingly rare. In 2023, only 3.5% of all office deals in the U.S. involved a distressed seller, based on analysis by MSCI Real Assets. The most recent numbers available show the share slipping to 2.7% in January. Distressed sales ramped up much faster in the GFC.

A strong economy is helping to delay the day of reckoning, as most tenants are still paying the rent. Pressure is building slowly as leases expire: Many companies are reducing their space by 30% to 40% when their contracts end.

Lenders are also eager to kick the can down the road. They don’t want to force borrowers to sell buildings into a weak commercial real-estate market, which would lead to punishing losses.

This might explain why debt maturities aren’t triggering the kind of distress that some property watchers expected. Of the $35.8 billion of office loans that came due in the commercial mortgage-backed securities market last year, only a quarter were paid off in full, according to data from real-estate analytics firm CRED iQ. Other loans were extended or sent to a special servicer—a third party that tries to find the best outcome for the debt, which may include modified payment terms or foreclosure.

Office loans are more complex today than they were during the 2008 crisis, which is delaying distressed sales. As there are more lenders involved—especially on the big buildings owned by institutional investors—getting everyone to agree to foreclose or sell a property is difficult.

For instance, of the roughly 600 defaulted CMBS office loans sent to a special servicer over the past two years, lenders have realized a loss on just five, according to CRED iQ analysis. In these cases, the buildings went into foreclosure and were sold off.

Opportunistic investors are crawling out of the woodwork with offers of debt. Reven Capital is trying to raise $1 billion in a blind-pool initial public offering for an office-focused distressed lender. “It’s 1929 for offices,” says Reven founder Chad Carpenter. He thinks distressed-debt funds will be able to lend at very favorable terms as banks have pulled back.

Blackstone, Brookfield, Cohen & Steers and Manhattan landlord SL Green Realty are also bullish about distressed real-estate lending. Ironically, Blackstone and Brookfield are simultaneously handing back keys to some of their offices.

Distressed-debt investors might slow the pace of forced sales in a handful of cases, but the office sector’s need for finance will soon massively outstrip supply. CBRE thinks U.S. office landlords face a $72.7 billion refinancing shortfall between now and the end of 2025.

The lack of distressed sales might also be a sign of wishful thinking. Some borrowers and their lenders are likely holding out for lower interest rates: Cheaper debt might limit the price cuts they need to accept when they sell. There are also hopes that some office demand might come back. It wasn’t long ago that remote work was considered a fad: The value of offices bought in 2021 was the second-highest since 2008, based on MSCI Real Assets data.

There are costs to holding out, though. It is expensive to insure and maintain offices that could end up obsolete. And when a flood of distressed assets does eventually hit the market, it will put further pressure on office values that have already fallen 35%.

Offices will be “the buying opportunity of our generation,” provided investors pick the right locations, says Mike McDonald, a senior managing director at real-estate firm JLL. Ultrawealthy families and local property developers are among the earliest investors gearing up to buy cheap buildings.

A flood of “For Sale” signs looks inevitable, but they are taking longer than expected to arrive.