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Wednesday, January 11, 2012

Offices: The Rent Rollover Problem

by Calculated Risk on 1/11/2012 12:47:00 AM

From the WSJ: Trouble Is Brewing for Office Market

[M]any [office] owners who have been able to keep their heads above water are being undone by tenant contractions and the expiration of five-year leases that were signed at the peak of the boom.

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.

Defaults and foreclosures are rising. The delinquency rate of office loans that were securitized hit 9% in December, up from 7.4% in June.
As these older leases expire, the tenants are demanding lower rents - or they are moving. Since some of these owners are barely "keeping their heads above water" with the old lease rates, lower rents or higher vacancies are leading to more defaults.

Even with a little improvement in the economy there is still more pain to come for commercial real estate, especially for offices and malls.