Delayed Impact: How COVID-19 Is Starting To Hammer Office Properties

Delayed COVID Impact

With corporate tenants typically locked into long-term leases, many office building owners have not lost money since the outbreak of COVID-19, even with so many employees working from home. But the growing trend of remote work is beginning to bear itself out in the numbers, as a record amount of office space is hitting the US market this year.

Real-estate services firm JLL (JLL) reported leases expiring this year account for 11% of the nation’s office space. With vacancies starting to pile up at this stage of the pandemic, both property owners and their lenders have come under pressure. Many companies are deciding to shrink their offices as the hybrid work model grows in popularity. Some who signed leases over the past several years have opted for short-term agreements, rather than the industry standard of 10 years or more.

Could Get Worse

Some analysts feel the trend could worsen for the office sector, as property owners have been frustrated by a slower-than-expected return-to-work process, combined with a national vacancy level of just over 12%. CoStar Group (CSGP) notes that’s the highest such number since the start of the pandemic, and more than 2.5% higher when compared to this time in 2019.

There are other challenges property owners face, perhaps chiefly the possibility of a broader economic slowdown, which always affects office leasing. Kansas City Fed President Esther George specifically noted the sector faces risks due to remote work and rising interest rates, which will harm not just property owners but also their lenders.

Problem Loans

Analysts explain that office buildings are especially vulnerable to vacancies because most of their expenses are fixed, and profits quickly diminish following even a modest drop in leasing revenue. This leaves property owners increasingly unable to meet their debt obligations, and triggers the rise of so-called troubled loans. Market watchers say the number of office loans considered at risk of default is at its highest level since 2010.

As banks begin reporting first-quarter earnings in the weeks ahead, the impact of troubled loans could become more clear. Financial services firm Stephens Inc. published a report this week noting both Heritage Financial Corp. (HFWA) and Eagle Bancorp (EGBN) have more than 13% of their loan portfolios backed by office buildings. Estimates suggest the hybrid work model will continue to cause a drop in office space demand, and that translates to vacancies.

Things are changing daily within the financial world. Sign up for the SoFi Daily Newsletter to get the latest news updates in your inbox every weekday.

Sign up

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store SoFi Android App, Get it on Google Play

James Flippin ABOUT James Flippin James Flippin is the son of a financial advisor who grew up hearing and learning about bond yields, interest rates, the stock market, and the ins and outs of Wall Street. After stints as a licensing and business broker for Marcus and Millichap in New York City, James moved into broadcasting and became a reporter and anchor. He covered crime, politics, finance, and tech at NBC News Radio while working part-time as a producer for SiriusXM. James graduated from the University of Delaware with a bachelor’s degree in political science and economics. He's also an accomplished podcaster with over 10-years of experience.

TLS 1.2 Encrypted
Equal Housing Lender