Tuesday, April 10, 2012
Concerns For Office Properties Rise As Leases Roll Over To Reduced Rates
Despite forecasts of decreasing vacancies and increasing rental rates in 2012, there are still major concerns for owners of office properties. In a recent Wall Street Journal article, authors Craig Karmin and Eliot Brown cite that the national delinquency rate of securitized office loans increased 1.4 points from 7.4% last June to 9.0% in December. This is familiar news to real estate professionals in Kansas City who recently witnessed owner Hertz Investment Group default on their $21.5M note for Commerce Tower in Downtown Kansas City. Karmin and Brown explain this trend by saying that due to the typical 5 year office lease, leases signed at peak rates in 2007 are now rolling over with tenants signing at drastically reduced rates.
Owners who have been able to stay afloat on loans signed just before the recession as a result of these above market rates are now seeing income levels fall below debt service thresholds. Adding to owners’ problems is that prospective new tenants are demanding big concessions and high capital outlays in the form of free rent and tenant improvements.
If there is one thing the Great Recession continues to teach us, it is that investing in fundamentals and using leverage wisely is paramount. For more than 70 years, BRES has taken this message to heart.