Expiration Conundrum: The Impending Shifts in CMBS-Backed Office Leases

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Episode Transcript:

Recent data from CRED iQ, as reported by Globe Street, paints a concerning picture for the years ahead. In 2024 and 2025, a staggering 217 million square feet of office leases in buildings backed by CMBS loans are slated to expire, posing challenges for landlords and investors. To break it down, that's 112 million square feet this year and an additional 105 million square feet next year.

CRED iQ's report offers a comprehensive view of lease expirations, shedding light on the hurdles the office sector must overcome. With over 500 million square feet of CMBS-backed office leases expiring over the next five years, the industry is at a critical juncture.

The epicenter of this challenge lies in the New York metro area, facing the largest volume of space coming due in the next two years and extending through 2028. In 2024 and 2025 alone, the city anticipates 32 million square feet in CMBS-backed leases reaching their expiration. When we extend the timeline through 2028, that number skyrockets to a staggering 173 million square feet.

Major cities such as Los Angeles, Chicago, Philadelphia, and San Francisco are also grappling with significant amounts of CMBS-backed space set to expire in the next two years, adding to the growing complexity.

Expired leases don't necessarily translate to vacant spaces, but the landscape has shifted dramatically with the rise of remote work. Companies are reconsidering their spatial needs, favoring flexibility and quality over sheer size. This shift puts landlords with substantial expirations at risk of downsizing or losing tenants altogether.

This downsizing trend has contributed to soaring office vacancy rates, surpassing 20% in some cities and even exceeding 30% in others. CRED iQ's latest data indicates that CMBS-backed office distress, reflecting the share of loans that are delinquent or in special servicing, reached 9.9% as of December, more than double the figure from twelve months prior.

This is Tyler Cauble, Signing off