Both US and European commercial property markets began deteriorating earlier this year.
Blackstone, the largest commercial real estate (CRE) investor in the world, defaulted on its €531m Finnish CMBS, FROSN-2018, which still had a remaining balance of €297m in early March. It blamed the idiosyncrasies of the deal — that it had felt during the war in Ukraine as a result of Finland's proximity to Russia. But the deal could be the canary in a coalmine that has endured a build-up of toxic gases since the pandemic.
There have been similar rumbles in the US with Columbia Property Trust, an office landlord owned by Pacific Investment Management (Pimco), defaulting on about $1.7bn of mortgage notes for seven buildings back in February.
Indeed, CMBS issuance is down 84% year-on-year while CRE CLOs are down 92%, according to a Bank of America report. Meanwhile, construction loans are "basically non-existent" for new projects and the office sector is "already in a recession", the report added.
The Green Street Commercial Property Price Index, which tracks live transaction price changes in US CRE, says property prices are down 15% in the last 12 months.
As the stress on the market has increased more investors have tried to pull funds from real estate investment funds (REIFs), including at Blackstone and in some UK-based entities. This has led to limits being place on redemptions by the fund managers.
The drivers are obvious. Not only have interest rates rocketed but you, dear reader, can see the other cause with your own eyes. Either you’re working at home, or you are in an office that is likely running under capacity. Even if your floor is full, take a look out of the window at the building next door — it is a good bet that it bears a closer resemblance to a lonely suburban tube station at midnight on a Sunday than it does a crowd scene from Ben-Hur.
To summarise, it's not looking good for offices.
The sector does of course, have its defenders. Lending standards have tightened, they say. Big city office loans are made by big, well capitalised banks that can handle pain, we are told. Smaller loans made by local lenders are signed off with better local knowledge, or with the land as collateral, it is argued. It won’t be like 2008, is the assertion.
The final point is a fair one. This crisis has been a long time coming which means investors and lenders in commercial property have had a very long time to adjust, even if the assets in their market are rather illiquid — commercial tenancy agreements can run for a very long time. And good luck shifting a skyscraper in a fire sale.
But as more and more tenants look for smaller, cheaper offices, the trend should continue to shift away from five days a week of packed offices as the norm, barring any drastic societal shifts.
Warren Buffet famously said that only when the tide goes out do you learn who has been swimming naked. The direction of the tide in commercial property is clear but it is a slow ebb. No competent player in this market should be without at least a handful of seaweed with which to protect their modesty.