What will happen this year when office lease expirations and loan maturations intersect?
There is a strong possibility of increased pressure and complexity in the commercial real estate market in 2024 and 2025 due to overlapping loan maturities and lease expirations, but whether it will result in a “financial chaos” remains to be seen.
This intersection certainly has the potential to create a very complex situation in the office sector of the commercial real estate market. Real estate data provider CRED iQ projects that over 217,000,000 square feet of office space leases will expire this year and in 2025, with over 17,000 leases expiring in 2024 alone. All while a decreased demand for office space continues to present itself – it is estimated that demand for office space has flatlined at 55% of pre-pandemic levels. This will give tenants much more leverage as they renegotiate leases with lower rents or smaller spaces, posing another challenge for property owners.
CRED iQ also estimates that a total of $320 billion of commercial mortgages are slated to mature within the next 24 months. Factors including higher interest rates and tighter lending standards could make refinancing challenging for some borrowers, potentially leading to loan defaults or distressed sales.
A variety of factors could contribute to the outcome of this intersection, but I believe the primary factors will be the most obvious ones – the future demand for office space and the willingness of banks to extend loan agreements.
The confluence of these factors could create a perfect storm for some property owners, especially those with high loan-to-value ratios and expiring leases with key tenants. Difficulty in refinancing loans, coupled with declining rental income due to vacant spaces or renegotiated leases, could strain finances and potentially lead to defaults or distress. This could impact lenders, investors, and other stakeholders in the commercial real estate market.
Not all loans and leases will mature/expire simultaneously, so the impact will likely be unevenly distributed across the market. A strong economy and healthy tenant demand could buffer some of the pressure, allowing for smoother lease renewals and refinancing options. Lenders and borrowers may be able to work out extensions or other solutions to avoid defaults. Government intervention or support programs could also play a role in mitigating the risks.
While the convergence of loan maturities and lease expirations in 2024 and 2025 undoubtedly presents challenges for the commercial real estate market, it’s too early to predict the outcome. The actual impact will depend on various factors, including the specific circumstances of each loan and lease, overall economic conditions, and the flexibility of lenders and borrowers to adapt. It’s likely to be a period of increased complexity and pressure, but not necessarily widespread crisis.
It’s important to remain informed about market developments and monitor the situation closely throughout the year. For further information on this topic, please call us at 781-848-9400.