Commercial RE crisis: Office landlords struggling with debt
Nearly a third (31 per cent) of UK office landlords are struggling with rising debt repayments, as the higher-for-longer interest rate environment takes its toll on the commercial real estate market.
A survey of 250 landlords, commissioned by workspace provider infinitSpace, found that 14 per cent said their office buildings are at risk of closing in the next five years due to affordability concerns.
25 per cent of landlords said that their office buildings do not currently generate a profit, while 20 per cent are unsure if they will be able to afford to pay off the debt secured on their commercial properties.
And nearly half (48 per cent) said that high inflation has made their properties’ ongoing operational costs difficult to manage.
Landlords are already working to mitigate these challenges, with 17 per cent having sold – or planning to sell – office buildings to remain solvent.
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Meanwhile, 20 per cent have made redundancies over the past two years.
There were mixed feelings about the outlook for the market among respondents. 50 per cent said they were confident in the financial performance of their office building portfolios over the next five years.
And 61 per cent believe office occupancy rates will increase over that period.
“Office landlords are facing a worrying array of financial challenges,” said Wybo Wijnbergen, chief executiveof infinitSpace.
“The high cost of borrowing has put immense pressure on the industry, only compounded by high inflation, which has made operational costs difficult to manage. So, it’s no surprise that many feel uncertainty about the current state of affairs for their portfolios.
“A strategic, future-focused approach that taps into market demand is key. Looking into converting underutilised properties into other real estate types with the help of third-party providers can equip landlords to thrive in the rapidly evolving workspace landscape, helping them secure a more stable financial future.”
Some private credit industry stakeholders have suggested that challenges in the commercial real estate market could present an opportunity.
Traditional banks have reined in their lending, which has created “a compelling opportunity for private credit to fill the void left by lenders currently on the sidelines,” according to Rich Byrne, president of Benefit Street Partners, which manages around $75bn (£58.4bn) of assets across a range of credit strategies.
“Currently there are a lot of challenges in commercial real estate, which presents a uniquely attractive opportunity for investors with fresh capital to deploy,” he told Alternative Credit Investor.
And analysis from KKR earlier this year which suggested there is a $500bn opportunity in the commercial real estate debt market as banks retrench from lending.
This funding gap will be filled by commercial mortgage-backed securities and debt funds, the investment firm said.