2020 Office Quarantine

Abstract

The hotel and retail sectors have been at the forefront of COVID-19-related investor concerns in commercial real estate. The office sector is the single largest property sector across commercial mortgage-backed securities with $149bn of outstanding balances across conduit and single asset, single borrower. Office sector delinquencies have remained relatively low through the COVID-19 crisis; however, COVID shutdowns have forced many corporations to shift to work from home (WFH) situations across the US. The success of WFH and the potential to reduce corporate occupancy costs may have longer term implications on office demand beyond the pandemic. This article reviews the health of the office sector, looks at office performance during the Great Financial Crisis, and considers the impact of wider acceptance of WFH policies on future office demand.

TOPICS: CMBS and commercial mortgage loans, credit risk management, financial crises and financial market history

Key Findings

• ▪ Office commercial mortgage-backed securities (CMBS) delinquencies to date have remained relatively low compared with the hotel and retail sectors.

• ▪ The office sector does not face significant near-term deadlines. Office debt maturities and lease rolls in CMBS are back-ended. Only 10% of office debt maturities (conduit) and 18% of reported lease rolls in CMBS are due in the next 2 years. The duration of office leases provides a longer runway for problems to be worked out.

• ▪ During the Great Financial Crisis (GFC), office revenues declined by roughly −17% and did not bottom for about 2½ years. Milder recession than the GFC; WFH acceptance has dented office demand, but this will be partly offset by higher square footage per employee needs once offices can reopen normally. Longer term office demand will return.