Recession Risk: $117 Billion Office Buildings Loan Bomb Due

Commercial real estate lending for U.S. office buildings across the country faces a $117 billion reckoning this year as loans come due for repayment or refinancing, the Daily Mail reported Monday, citing data from the Mortgage Bankers Association.

A sizable amount of that commercial debt is teetering on the edge of a costly default for banks and developers. Smaller regional banks without the balance sheets to withstand it may even be in danger of cash insolvency and bankruptcy after a wave of defaults, the Daily Mail said in its report.

The cities with the most loans up for refinancing in 2024 are in California, Texas, and New York. An example is the Seagram Building in Manhattan. Its $760 million mortgage in 2012 assumed the building would bring $74 million in revenue annually. But in 2022, two years after the pandemic, it brought in only $27 million.

Revenue from office buildings fell drastically during and after the pandemic as more companies shifted to work-from-home arrangements with their office workers. Economists found in December that 40% of office loans on bank balance sheets were “underwater” or owed more to the bank or developer than the building is now worth.

Meanwhile, Moody’s Analytics estimates 224 of the 605 loans expiring in 2024 will be difficult for the commercial borrowers to repay or refinance because their balance sheets are too leveraged with corporate debt or they aren’t making enough money from the buildings. With U.S. interest rates soaring at the start of 2024, refinancing these loans will be especially difficult.

Market analysts hope the Federal Reserve will cut the target interest rate sometime in the first half of this year, giving these borrowers some cushion to refinance.

A recession in 2024, a presidential election year, will most likely be bad timing for the White House incumbent, President Joe Biden. The president’s job approval and polling numbers against his most likely general election adversary — former President Donald Trump — have suffered due to high inflation and economic woes felt by Americans.

In a November survey, over half of those who voted for Biden in 2020 rated the economy as fair or poor.