KBRA releases research on the office sector and the headwinds it faces.

Office landlords fared comparatively well during the pandemic because of diverse rent rolls and long leases that helped keep a lid on the sector’s CMBS office delinquency and special servicing rates. However, recent negative news regarding the office sector is inescapable. While cyclical forces are impacting office, secular changes, especially remote and hybrid work models, could have a negative lasting impact on office demand and property values, putting downward pressure on rents and occupancy levels for many older buildings, even less amenitized Class A buildings.

Owners of aging buildings that lack the amenities and infrastructure that tenants need to entice existing workers back to the office and attract and retain new talent could decide it makes sense to convert them to apartments or hotels. A sign of the times is New York City office owner RXR Realty’s recent announcement that it would “give back the keys” to lenders on some of its older assets and would not invest in its older buildings unless they could be converted to another use. However, conversions are costly and not all buildings are readily alterable to another use; in fact, some buildings may not be suitable for any type of conversion. Nonetheless, office conversions are on the rise, and cities such as New York are facilitating conversions by removing barriers and providing incentives for landlords. Unfortunately, in the short term, conversions are not expected to happen fast enough to put much of a dent in the supply of underutilized office space.

The report is part of KBRA’s ongoing series on the secular trends that are transforming the “new normal” landscape in commercial real estate (CRE) across property types.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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