Some bank chiefs, like JPMorgan’s Jamie Dimon, talk as if the office will soon look more or less as it did before. Their real estate lending teams seem less sure.
Banks on both sides of the Atlantic are becoming more selective about which offices they will lend against. Pockets of the market have been resilient during the pandemic: The rate banks charge for mortgages on the best central London offices was 1.65% in the first quarter of 2021, more or less where it was before the crisis, data from real-estate company CBRE shows. But U.K. lending margins for older, less central offices are close to historic highs, based on the Cass Business School’s commercial real estate lending report.
In the U.S., the value of new office loans issued by banks in the first quarter of this year was just 35% of levels in the same period of 2019, according to Trepp data—a sharper pullback than for unloved retail assets such as malls. The spread between office mortgage rates and 10-year Treasurys also has widened from precrisis levels.
The rise in debt costs is notable because default rates on existing office loans are currently below 1%. Corporate tenants locked into leases are continuing to pay the rent, so landlords have met their mortgage payments. But that could change once existing contracts roll off and white-collar employees spend more time at home. Companies ranging from tech giant Facebook to global bank HSBC plan to let some staff work remotely on a permanent basis.
Oversupply is already an issue in San Francisco, leading to big falls in rent and high vacancy rates. Lenders are also watching New York closely. In the mid-Atlantic region, which includes the troubled Manhattan market, almost one-third of banks’ outstanding office loans now fall into the riskier “criticized” category, up from 6% before the pandemic, survey data gathered by Trepp shows.