Record Amount of Commercial Space to Open Up This Year

New York, NY, April 13, 2022-A record amount of U.S. office space is hitting the market this year due to a jump in lease expirations, putting property owners in a bind and threatening to leave banks and other lenders stuck with more troubled loans, reports the Wall Street Journal.

“Most office building owners have been able to ride out the pandemic because corporate tenants have been locked into long-term leases. They continued paying rent even when their employees stayed home. Now as more leases expire, a growing number of tenants are shrinking their offices because they need less space under hybrid strategies that blend office with remote work, brokers say.

“Leases for 243 million square feet of U.S. office space are set to expire in 2022, the most office space to hit the market in a single year since real-estate services firm JLL began tracking this data in 2015. The expiring leases represent about 11% of the nation’s overall leased office space.

"The rise in office space hitting the market this year is a direct result of the pandemic. Many office tenants whose leases expired last year or in 2020 negotiated extensions of only a year or two, rather than renewing at the typical length of ten years or longer, as these firms tried to determine how much less space they might need under a hybrid approach.

“The looming lease expirations represent a 40% increase since 2018 and pose a new threat for office landlords already frustrated by stubbornly slow return-to-office rates and a national vacancy level of 12.2%. That rate is a high for the pandemic period and up from 9.6% at the end of 2019, according to real-estate data firm CoStar Group Inc.

“It could move higher. Real-estate analytics firm Green Street estimates that hybrid work will cause a 15% drop in demand for office space. Because most building expenses are fixed, even a small drop in leasing revenue often leads to a big drop in profits and an even bigger drop in a building’s value. An economic slowdown could add further strain because office leasing is highly dependent on the economy.

“Troubled loans to office building owners are also on the rise. In February, 21.2% of office loans made after the global financial crisis packaged into commercial mortgage securities were either being handled by special servicers or on watch lists, two closely watched categories that could lead to defaults, according to a Barclays report. That’s the highest level since 2010.”