In a pivotal moment for the commercial real estate industry, CRED iQ’s recent analysis reveals that approximately 217 million square feet of office space across the United States is on the brink of lease expirations in 2024 and 2025. This development arrives amidst a backdrop of record-high office vacancies, reshaping the landscape of the office sector as we enter 2024.
The surge in remote working and the consequent need for businesses to reduce real estate costs have led to a significant downsizing and non-renewal trend among office tenants. This shift poses considerable challenges to the office real estate sector, already grappling with economic uncertainties and changing work paradigms.
A closer look at the lease expiration data, particularly within the realm of Commercial Mortgage-Backed Securities (CMBS) office collateral, offers insights into the potential areas of distress. Over the past year, office collateral has emerged as a primary source of increased distress in the commercial real estate market. CRED iQ’s analysis indicates that the distressed rate for CMBS office loans stood at 9.9 percent as of December 2023, more than doubling from the previous year.
| Metropolitan Statistical Area | Total SF Expiring Through 2028 |
|---|---|
| New York-Northern New Jersey-Long Island, NY-NJ-PA MSA | 173,414,438 |
| Los Angeles-Long Beach-Santa Ana, CA MSA | 51,934,523 |
| Chicago-Naperville-Joliet, IL-IN-WI MSA | 45,542,659 |
| Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA | 32,672,253 |
| Washington-Arlington-Alexandria, DC-VA-MD-WV MSA | 31,346,720 |
| San Francisco-Oakland-Fremont, CA MSA | 30,291,655 |
| Dallas-Fort Worth-Arlington, TX MSA | 23,578,162 |
| Houston-Sugar Land-Baytown, TX MSA | 23,474,899 |
| Detroit-Warren-Livonia, MI MSA | 21,010,322 |
| Seattle-Tacoma-Bellevue, WA MSA | 20,320,089 |
| San Jose-Sunnyvale-Santa Clara, CA MSA | 18,038,215 |
| Boston-Cambridge-Quincy, MA-NH MSA | 17,651,440 |
| Miami-Fort Lauderdale-Pompano Beach, FL MSA | 17,352,293 |
| Atlanta-Sandy Springs-Marietta, GA MSA | 15,861,798 |
| Phoenix-Mesa-Scottsdale, AZ MSA | 14,643,154 |
| Minneapolis-St. Paul-Bloomington, MN-WI MSA | 12,148,811 |
| Pittsburgh, PA MSA | 11,369,275 |
| Denver-Aurora, CO MSA | 10,461,006 |
| Cleveland-Elyria-Mentor, OH MSA | 10,221,527 |
| San Diego-Carlsbad-San Marcos, CA MSA | 8,712,666 |
| New Orleans-Metairie-Kenner, LA MSA | 8,410,255 |
| Charlotte-Gastonia-Concord, NC-SC MSA | 8,256,939 |
| Kansas City, MO-KS MSA | 8,210,694 |
| Indianapolis-Carmel, IN MSA | 7,611,998 |
| Las Vegas-Paradise, NV MSA | 7,460,126 |
Focusing on a broader time horizon, CRED iQ examined over 866 million square feet of CMBS office and mixed-use collateral properties. The findings point to over 500 million square feet of net rentable area (NRA) scheduled for lease expiration in the next five years, with significant expirations slated for 2024 and 2025.
Geographically, the New York Metropolitan Statistical Area (MSA) emerges as a hotspot, with over 173 million square feet of leases due to expire through 2028. Other notable MSAs include Los Angeles, Chicago, Philadelphia, and San Francisco, collectively contributing to an impending 44 million square feet of lease expirations.
Among the key properties to watch is the Worldwide Plaza office tower in New York City. The tower faces a significant lease expiration in 2024, particularly with its second-largest tenant, Cravath, Swaine & Moore LLP, set to vacate and downsize. Furthermore, the Google and Amazon Office Portfolio in the San-Jose market represents another critical asset, with major lease expirations looming in 2024.
Despite the looming risks, it’s not all bleak for office landlords. Many tenants are expected to renew or expand their office spaces. However, the current landscape, marked by soaring vacancy rates and downward pressure on net effective rents, suggests a cautious approach. Landlords may find opportunities to reset rents higher, but they must also brace for potential reductions in cash flow and subsequent distressed scenarios.
In conclusion, the convergence of high vacancy rates and a wave of lease expirations in the office sector presents a complex scenario for stakeholders in the commercial real estate industry. As the market navigates this challenging period, the decisions of tenants and landlords in the coming months will play a crucial role in shaping the future of office real estate.
