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The Henley Group (THG) brings you news you can use. We take a deeper dive into what's confronting Office CMBS loans.

Caution: Delinquency Ahead
In contrast to the continuous decline of delinquency rates for specially serviced CMBS lodging and retail loans, it may not be surprising that Office CMBS loan delinquency rates have risen as many companies continue to allow employees to work from home (WFH) or have adopted a hybrid model.

According to a recent survey of 160 major employers by the Partnership for New York City conducted between April 21-May 4, 2022:
  • Nearly 80% of employers plan on using a hybrid model when the pandemic ends compared to 6% before Covid-19
  • Only 49% of office workers are expected to return to their Manhattan offices, even after Labor Day
  • A mere 8% of workers are full-time in their NYC offices five days a week
  • On the average weekday, only 38% of workers are present in the office
Remote takes over. 18.1% office vacancy. $31B office loans due.
With $31 billion of CMBS office loans spread over 500 properties maturing by 2023 (according to Trepp), Lenders are taking a hard look at what percentage of the workforce will physically return to office buildings and its impact on tenancy in the next several years. How will companies assess their CRE needs and how will these decisions shape occupancy levels in the future?

As of April 1, 2022, the national office vacancy rate reported by Moody's Analytics is 18.1%. But strong anecdotal evidence suggests that many tenants are downsizing and/or moving towards higher quality Class A office space, leaving Class B and Class C properties struggling.
Guesstimating
In an April interview with Cedrik Lachance, Director of Research for Green Street Advisors, a California-based research firm analyzing over 130 real estate investment trusts (REITs), he points out that we are all guesstimating what the work-from-home impact is going to be on the office business long term.

While many firms are using Q2 as the moment to firm up permanent policies surrounding the subject, the policies themselves range enormously.

Financial firms and investment banks in New York require close to a five-day workweek, while on the other end of the spectrum, tech companies like Slack and Meta (formerly Facebook) seem to be okay with allowing employees to work from home permanently. Google is taking the middle ground, offering employees a three-day workweek. Additionally, the idea of ramping up the concept of hoteling, meaning no assigned desks, has worked for the consulting industry in the past, we’ve never seen it put to the test at scale. 
THG believes 2022 will roll into 2023 with companies still noodling on workspace optimization but continue to hold the upper hand in lease negotiations with most landlords.
A Flight to Quality
According to Commercial Observer’s April 19th article, “The Real Story of Office Right Now,” a subset of the office market will likely prove an exception to the trend and is predicted to do quite well.
  • Newer, greener Class A properties recently built, or being built, in core urban cities (e.g., One Vanderbilt and One Madison in NYC) should have enormous demand from tenants who are looking to attract high-caliber employees with quality office space.
  • Plus, these office buildings will meet certain sustainability and ethical impact standards–the “E” in ESG (environmental, social, and governance)–a growing priority for shareholders, other stakeholders, and employees as well.

Office buildings which do not recognize greener demands will find it increasingly difficult to compete for tenants in a marketplace where overall vacancy levels have soared.
Class B⇣
While reinvestment of capital and/or redevelopment of some at-risk, Class B office buildings may be fruitful, others certainly will not. Given the relatively low demand for Class B office space, buildings that require significant TI to upgrade and compete may not have positive net effective rent increases (rent after TI). The investor may be better served by avoiding reinvestment, unless a workable loan restructure can be negotiated with the Lender.
A day late. A dollar short.
The best course of action for Owners is to make plans now. Getting ahead of looming challenges empowers you with more opportunities and options.

THG, advocating on your behalf, can extend negotiations with Servicers, while vigorously assessing the market and advising on optimal solutions for the best outcome. Is it worthwhile to hold onto your office building and find a new tenant? Or is letting go and moving on the most beneficial way to proceed?

ABOUT THE HENLEY GROUP

We are expert CMBS Borrower Advocates with extensive experience partnering with clients to catalyze loan resolutions. Dedicated to service excellence and outstanding outcomes, we have worked out over $10 billion in CMBS deals to date. We are proud of the deep relationships The Henley Group has forged with Special Servicers for nearly 15 years. Our unique skill set, patient negotiating style, and understanding of Special Servicing allow us to get results that may not be available to you.
Call David Goldfisher (617) 320-0284
Call David Arthur (617) 719-1087