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Strength in Seattle, Cracks in Chicago, and the Flight from Aging Office Properties

DBRS Morningstar published a commentary reviewing the Seattle and Chicago commercial mortgage-backed securities (CMBS) office markets and examined the stability of office loans in those markets throughout the Coronavirus Disease (COVID-19) pandemic. The Seattle market is strong with ample new construction and high occupancy rates, while Chicago is seeing great variability in office loan performance based on property and loan characteristics. Large office tenants continued to stay current on lease payments during the pandemic, providing great stability for the overall CMBS office market, but until leases reach maturity, the true effect of the pandemic will not be fully realized.

Key highlights include the following:
-- Remote-work policies of major office tenants will reduce demand for office space, but a strong economic recovery is likely to offset much of the negative effect these policies will have on the CMBS office market as employment growth is a major driver of office demand.
-- We expect office loans in the Seattle market to continue performing well on the shoulders of major tenants’ financial strength and robust employment growth in the area. Many of these key tenants are thriving technology companies that are continuing to expand their footprint in the area and build out their respective spaces.
-- Chicago is expected to perform less favorably given aging office stock in the area. Aging properties have struggled to lease space and have resulted in increasing rates of specially serviced and delinquent loans throughout the pandemic. Furthermore, the migration of people and companies away from northern cities like Chicago and New York will also affect office demand and long-term office loan performance in the Chicago market.

“There is evidence to suggest that the narrative about the death of the office is overblown, but not totally inaccurate. The fallout from the coronavirus pandemic will take years to fully materialize in the sector. Many loans are still current; however, as major tenant leases expire and CMBS loans reach maturity in three to five years, we will begin to see the true effect of the pandemic on the office sector more clearly. Looking ahead, while large tenants and employers may implement long-term remote-work policies, we expect that a strong economic recovery will offset their give-back of space, keeping demand for office space and CMBS office loans stable,” said Zach Evens, Associate Data Research Analyst, Data and Development Center, Americas.