US office buildings face $117BN debt time bomb: Mortgages due this year threaten to sink US economy as thousands of workplaces remain empty
• Hundreds of loans on office buildings are about to come due at a very bad time
• Loans were taken out in time of low interest rates and are now hard to refinance
• Too many of the loans defaulting could trigger banking crisis and hurt economy
Billions of dollars in loans on office buildings that are about to come due could play havoc with the US economy after interest rates soared.
About $117 billion worth is expected to be due this year and needs to be repaid or refinanced, according to the Mortgage Bankers Association.
A big chunk of it is at risk of defaulting and costing banks and developers huge sums, sending some into insolvency.
Owners of office space around the country took out their loans when interest rates were half what they are now, and may not be able to refinance them at higher ones.
Commercial mortgages, unlike home loans, are almost always paid interest-only, leaving the original price to be paid at the end, or refinanced to start the process again.
At the same time, revenue from office space fell as many businesses downsized their premises as many of their staff were working from home since the pandemic.
Economists last month found 40 per cent of office loans on bank balance sheets were underwater – owing more than the property is worth.
Smaller regional banks who loaned the money to buy them could themselves be at risk if the loans default as they are not big enough to handle the losses.
Moody’s Analytics estimates 224 of the 605 loans that will expire soon will be tough to repay or refinance because their owners have too much debt or the buildings aren’t making them enough money.
The analysts predict buildings would need to be generating at least nine per cent of their debt in annual income or their owners will struggle to refinance.
One example is the Seagram building on Park Avenue in Manhattan, which was mortgaged at $760 million in 2012.
The loan assumed the building would bring in $74 million in revenue a year, but the best it ever did was $69 million in 2018 – and only $27 million in 2022, according to the 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 predicted.
