US office buildings face a $117 billion debt time bomb: Mortgages due this year threaten to sink the US economy as thousands of workplaces remain empty

Billions of dollars in loans for soon-to-maturing office buildings could wreak havoc on the U.S. economy after interest rates spike.

About $117 billion is expected to be repaid this year and will need to be repaid or refinanced, according to the Mortgage Bankers Association.

Much of it is at risk of defaulting and costing banks and developers huge amounts of money, pushing some into bankruptcy.

Office space owners across the country took out their loans when interest rates were half of what they are today, and may not be able to refinance them at higher rates.

Commercial mortgages, unlike home loans, are almost always paid with interest only, with the original price having to be paid at the end, or refinanced to start the process over.

At the same time, office space revenues fell as many companies downsized with many of their employees working from home since the pandemic.

An economist found last month that 40 percent of office loans on bank balance sheets were underwater – more debt than the property is worth.

Smaller regional banks that borrowed the money to buy them could themselves be at risk if the loans are no longer made because they are not large enough to absorb the losses.

Moody’s Analytics estimates that 224 of the 605 soon-to-maturity loans are difficult to pay off or refinance because the owners have too much debt or the buildings don’t make them enough money.

The analysts predict that buildings will need to generate at least nine percent of their annual debt burden or owners will struggle to refinance them.

An example is the Seagram Building on Park Avenue in Manhattan, which had a $760 million mortgage in 2012.

The loan assumed the building would generate $74 million in revenue per year, but the best it ever did was $69 million in 2018 — and only $27 million in 2022, according to the report. Financial times.

The light at the end of the tunnel for office space owners is that the Federal Reserve is expected to start cutting interest rates earlier than forecast.

Interest rates were raised to the current 5.5 percent to contain rising inflation over the past two years.

But now that the inflation that plagued household budgets has eased sooner than expected, interest rates may start to fall.

Higher interest rates, intended to curb inflation, continue to depress real estate values ​​by deterring buyers – a phenomenon exacerbated by persistent office vacancies

Market analysts hope this will limit the damage as $1.5 trillion in real estate mortgages will be paid off over the next two years.

As this event looms, major banks like Wells Fargo are already cutting losses by preparing to pay off debt at a discount even as borrowers are aware – a sign of their lack of confidence in the once-strong commercial real estate market.

Meanwhile, higher interest rates, intended to curb inflation, continue to depress real estate values ​​by deterring buyers – a phenomenon exacerbated by persistent office vacancies.

The pandemic-induced phenomenon comes as remote working has maintained a prominence since it surfaced during the pandemic – and its arrival that has hit offices, and as banks extend their real estate lending.

The willingness of some lenders to take losses on currently performing real estate loans comes as several experts continue to warn that the asset class is the “next shoe to drop.”

After the recent unrest in the banking sector, this increases the chance of a new recession as a result of a mortgage crisis.

While this is bad news for landlords looking for a new lease on their office buildings, the prospect of widespread bankruptcy and resulting demand declines could hamper construction and development in major U.S. cities – many of which are still struggling to to recover in the aftermath of the crisis. the pandemic.