CRED iQ examined lease expiration data across CMBS office collateral for the near term, 24-month horizon, as well as the next 5+ years. Office vacancies nationwide have reached an all-time high as we enter 2024. CRED iQ’s data shows approximately 217 million square feet of office space have leases with expiration dates in 2024 or 2025.  As tenants regroup and re-size their office footprints, CRED iQ explored the intersection of record vacancy rates with near- and medium-term lease expirations.    

Downsizing and non-renewal by office tenants is a contributing factor to headwinds facing the office sector, which has been plagued by sustained growth of  remote working and tenants’ need to shed space, reduce real estate costs, and right-size physical footprints during a period of economic uncertainty.

A high-level view of lease expirations provides a general sense, or foreboding in some instances, of the mechanics that the office sector needs to work through as the property type falls out of favor with lenders, investors, and other CRE industry constituents. Lease expiration analysis offers an important dimension to evaluate when and where the next pockets of elevated office distress will materialize.

Office collateral has been a primary contributor to incremental distress in commercial real estate throughout 2023. CRED iQ’s distressed rate for CMBS office loans, which includes delinquent loans and specially serviced loans secured by office collateral, was 9.9% as of December 2023. Furthermore, the distressed rate for office collateral has more than doubled compared to 12 months prior.

CRED iQ examined over 866 million square feet for CMBS office and mixed-use collateral properties. For this exercise, CRED iQ focused on upcoming lease rollover over the next five plus years.  It should be noted that office collateral securing CMBS does not represent the entire office market, but rather serves as proxy to identify challenges facing the larger universe of office properties.

Takeaways from our observations include: over 500 million square feet of net rentable area (NRA) is scheduled to expire over the next 5 years for office and mixed-use properties secured by CMBS loans. 112 million square feet of office space is set to expire in 2024; and another 105 million square feet in 2025 for a total of 217 million square feet of near-term rollover risks. 

Lease expiration figures were further parsed by geographic location to provide a granular view by MSA. A detailed view of lease expirations by individual office market helps identify which markets’ vacancy rates are at risk of being stressed. The data was parsed to isolate the next two years and the next five years.

In both timeframes, the New York MSA had the highest gross space in the country and the most leases scheduled to expire.  More than 173 million square feet of leases in the New York MSA are scheduled to expire in through 2028, with 32 million square feet scheduled to expire in 2024 and 2025.

Other noteworthy MSAs with elevated lease rollover in the next two years include the Los Angeles (15M SF), Chicago (12M), Philadelphia (9M), and San Francisco (8M) markets, accounting for an aggregate 44 million square feet.   

Let us highlight two major assets to monitor in 2024:

The $940.0M loan secured by the Worldwide Plaza office tower in New York City will be facing increased vacancy in 2024 with 33% of the NRA scheduled to expire. The 2024 lease rollover is highly impacted by the second largest tenant, Cravath, Swaine & Moore LLP’s lease expiration on August 31, 2024. The tenant currently represents 30% of the NRA and has confirmed it will be terminating its lease at expiration to downsize and relocate to Hudson Yards. Two additional top five tenants have leases scheduled to expire in the next five years including Worldwide Plaza Garage (6% NRA, 2027) and WNET.org (5%, 2026). The property was 91% occupied as of September 2023.

More than 1,500 leases from tenants that are the sole occupant of a property are scheduled to expire in the next five years. This represents 161M SF (19%) of the total NRA set to expire. Over 275 leases are scheduled to expire in the next two years, however the max leases expire in 2028.

The Google and Amazon Office Portfolio is backed by two sole-tenant office properties in the San-Jose market. The Technology Corners property (700,000 SF) and Moffett Towers Building D (357,000 SF) are leased by Google and Amazon, respectively. Google accounts for 66% of the portfolio NRA with a lease expiration scheduled on September 30, 2024, while Amazon’s lease expires on February 29, 2024. Neither tenant has early termination options, however Google has a seven-year renewal option and Amazon has two, seven-year renewal options. Servicer commentary indicates the borrower is negotiating with Google for a renewal. On top of the upcoming lease expirations, the $412.4M loan is scheduled to mature this month.

To be fair, many tenants will renew or even expand footprints in certain office buildings. However, rising vacancy rates — in excess of 20% and even reaching 30% in certain markets — indicate a high level of risk that many tenants will downsize or fail to renew altogether. Lease expirations may have possibly favorable outcomes for office landlords, including a renewal or new direct lease that resets rents higher if market conditions allow. However, high vacancies and downward pressures on net effective rents may lead to reductions in cash flow and trigger subsequent distressed scenarios.

About CRED iQ

CRED iQ is a commercial real estate data & analytics platform used by investors, lenders, brokers, and other CRE finance professionals. The easy-to-use interface is fully equipped with official loan and financial data. The platform is supplemented with true borrower and ownership contact information, valuation software and refinance models.

As an official market data provider, CRED iQ’s is powered by over $2.0 trillion of audited loan and transaction data that includes all property types and geographies. CRE professionals leverage CRED iQ for a wide spectrum of use cases such as uncovering acquisition & lending opportunities, market analysis, underwriting, and risk management.

Overall distressed levels remain relatively unchanged, while industrial segment’s distressed rates almost double this month.

Following 10 consecutive increases CRED iQ’s overall distress rate for CMBS fell modestly in November by 5 basis points to 7.52%.  There are important variables impacting these results—including some previously reported anomalies in the October print.

The core delinquency rate increased by 13 basis points to 5.27% – after recording a minor reduction in October.  Similarly, our special servicing rate, which represents the percentage of CMBS loans that are with the special servicer (includes both delinquent and non-delinquent), increased by 6 basis points to 6.84%.

Looking across the CRED iQ Distressed Rate Heat Map, the retail segment enjoyed its second consecutive month turning in an overall distress rate under 10%. On a month-over-month basis, however, retail overall distress increased by 35 basis points to 9.82% – putting a three month/sub 10% trend on thin margins.

Industrial saw the greatest month-over-month distress increase from 1.81% to 4.53%.  The industrial segment has spent most of 2023 below 1.0% until October.  One significant factor was the $2.2 billion industrial portfolio (BX Trust 2021-ACNT) that failed to pay off on its initial November 9, 2023 maturity date. The failure to pay off at maturity caused the payment status to change from current to performing matured. There are three 12-month extension options, allowing for an extended maturity through November 2026.  The floating rate loan, which was originated in October 2021, is structured with an interest rate that equates to one-month LIBOR plus a 2.37% spread rate, which has now spiked to 7.82%.  The sponsor of the loan, Blackstone, had their interest rate cap agreement expire on November 15, 2023, which had an original strike rate of 3.50%.

Lodging, multifamily and the well-watched office segments all trimmed their Distressed Rate month-over-month modestly. 

Self storage continued to dominate the overall delinquency rate performance at 1.33%, 2 basis points off the 2023 high of 1.35%. Self storage logged three months with 0% delinquency, and most months in 2023 were in the single digits. 

Nearly half of the delinquencies were categorized as Non-Performing Matured Balloon.  Approximately 25% were 90+ Days Delinquent and just below 20% were Performing Matured Balloon. 

CRED iQ’soverall distress rate aggregates the two indicators of distress – delinquency rate and special servicing rate – into an overall distressed rate.  This includes any loan with a payment status of 30+ days or worse, any loan actively with the special servicer, and includes non-performing and performing loans that have failed to pay off at maturity.    

As with the October report, we caution that November’s results are inconclusive from a trending perspective. With that said, it is noteworthy that all but 2 defined segments logged reduced delinquency month over month (the Other category saw an increase).     

About CRED iQ

CRED iQ is a data & analytics platform used by commercial real estate brokers, lenders, investors, and appraisers. It provides an easy-to-use interface, comprehensive and official loan data, true borrower and owner contact information, and a built-in valuation tool. As an official data provider, CRED iQ’s precise and audited data includes across all property types and geographies, all of which help CRE professionals leverage CRED iQ for a wide spectrum of use cases such as uncovering acquisition and lending opportunities, market analysis, underwriting, & risk management