Although Current Distress Levels Are Low, Office Properties Backed by Nonperforming CMBS Loans May Signal Potential Defaults.

The office sector is still reeling from the popularity of remote work, which means it will likely be more affected than other property types if a recession were to hit.

Persistently higher rates of remote working since the pandemic have plagued the office market, acting as a governor on demand growth and leading to higher vacancies. Now, the declining macroeconomic environment presents another headwind for the property sector.

Expected layoffs stemming from a potential recession would exacerbate the lower demand for office space that property owners are already facing in trying to maintain building occupancy and revenue. The amount of vacant office space nationally has reached 12.4% of inventory, the highest level since 2011. Sublease space availability is also rising, and asking rents, while showing positive year-over-year growth, have yet to recover to pre-pandemic levels nationally. On top of remote work pressures, rising interest rates and the increased likelihood of a recession may lead to distress and forced sales as refinancing challenges increase.

Current levels of distress in the office market are relatively low, with sales volume down modestly from earlier in the year as deals continue to transact, and delinquency rates have yet to move up significantly from levels reached over the past year. A gauge of where the distress may surface first …

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October 10, 2022, Nancy Muscatello, CoStar Advisory Services