Office Landlords Face Unprecedented Loan Crisis with Rising Defaults

Plus: MSCI reports a steep 72% year-over-year drop in apartment sales for October, marking 14 months of continuous decline.

Office Landlords Face Unprecedented Loan Crisis with Rising Defaults

Plus: MSCI reports a steep 72% year-over-year drop in apartment sales for October, marking 14 months of continuous decline.

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Good morning. The office real estate market is experiencing its worst credit crunch since the 2008-09 global financial crisis. MSCI notes 14 months of falling apartment sales. Meanwhile, San Francisco Bay's only private island has been listed for sale at $25 million.

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Market Snapshot

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*Data as of 11/17/2023 market close.


Office Landlords Face Unprecedented Loan Crisis with Rising Defaults

bank with rising debt

Source: The Wall Street Journal

The office market is facing a severe credit crunch, with conditions now more challenging than during the 2008-09 global financial crisis.

Credit crunch: A stark decline in loan repayments, exacerbated by changing work patterns and economic factors, is causing widespread distress among office landlords. In 2023, only one-third of securitized office mortgages that matured were paid off, a significant drop from previous years.

Between the lines: Before the pandemic, over 80% of such mortgages were routinely cleared. The decline in repayments reflects a broader lending market freeze for office buildings, driven by remote work trends, increasing vacancies, and rising interest rates. These factors have diminished building profits and inflated debt costs, leading to a worrying increase in loan defaults.

Case in point: In 2018, Kushner Cos. and RFR Realty secured a $480 million mortgage for four Brooklyn office buildings, with an occupancy rate of 94% and a favorable interest rate of 4%. By 2023, occupancy dropped to 78%, exacerbated by WeWork's departure. Unable to secure new financing as the building's value plummeted from $640 million to $207 million, they defaulted on the balloon mortgage when it matured in September, highlighting the acute challenges in the office real estate sector.


Struggle for new financing: The office real estate market is experiencing a severe downturn in loan repayment rates, decreasing from 88% in 2019 to just 31.2% in 2023. This decline is primarily attributed to landlords' inability to secure new financing for maturing debts, a once-standard practice. With banks hesitant to issue new office loans and alternative sources providing less favorable terms, landlords are increasingly unable to meet their existing loan obligations, leading to a significant increase in defaults.


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  • 50% off: Strada Investment Group is set to buy a San Francisco office building at 201 Spear St. for $60M, less than half its price from a decade ago, amid market changes, including rising vacancies and falling rents.

  • STEM job growth: Austin leads, for the second year, in STEM job growth momentum, followed by Denver, Seattle, Raleigh, and Washington, DC, while San Jose tops in STEM employment.

  • Tax surprises: In 17 states and Washington, D.C., estate and inheritance taxes, often with changing rules, catch families off guard, who saw a significant tax reduction due to a retroactive law change.

  • Leadership change: David Lipson succeeds Mitchell Rudin as CEO of Savills North America, while Rudin continues as the chairman of the company's North American brokerage.

  • Nursing home reporting: The Centers for Medicare & Medicaid Service now mandates that nursing homes provide more detailed reports on their ownership and type under a newly issued final rule.


MSCI Highlights 14 Consecutive Months of Declining Apartment Sales

A new report from MSCI Real Assets reveals a stark downturn in apartment sales, dropping for 14 straight months and showing a significant 72% year-over-year decline in October.

By the numbers: In October, apartment sales plummeted to $6.2 billion, marking a 72% drop compared to the previous year. Prices also fell by 13.7%. This trend is partly due to the absence of entity-level deals, which typically boost sales figures. The current lack of such deals is the third-longest in the apartment sector's history, following only the periods post-Global Financial Crisis and the onset of the COVID-19 pandemic.

Zoom in: Despite falling apartment prices, the market hasn't seen a significant increase in deals. The cap rates in October were at 5.2%, only marginally higher than the 10-year U.S. Treasury rate of 4.8%, making it less attractive for investors, especially with slowing growth in rental market rates. Deals are difficult to finalize unless sellers become more desperate or buyers find unique opportunities like assuming loans with lower interest rates.

Uneven distress: Most property owners, particularly in cities like New York and San Francisco, aren't experiencing significant stress, except for those holding lower-level assets or over-leveraged properties. Ric Campo, CEO of Camden Property Trust, noted that failed deals primarily involve over-leveraged, lower-grade transactions.


Why it matters: The prolonged higher interest rate environment is reshaping the apartment sales market, leading to fewer transactions and price reductions. While distress in the market is not yet widespread, ongoing economic pressures may lead to more market dislocations and potential discounts in the future. This situation presents a complex landscape for investors, balancing caution with the possibility of future opportunities.


📖 READ: This guide provides insights into managing interest rates, depreciation, and recent tax changes in the real estate sector as the year ends.

🎧 LISTEN: The Dallas-Fort Worth Metroplex's unending growth, as described by CoStar's Colin Sherman on the Hotel News Now podcast, is elevating it to a top-tier hotel market in the country, with the entire region and its submarkets experiencing a boom.


For $25 Million, Own an Island in S.F. Bay – No Water, Power, Wi-Fi, or Parking Included

Red Rock Island, San Francisco Bay's only private island, has been listed for sale at $25 million. This uninhabited 6-acre island, known for its distinctive dome shape and rich history, offers a once in a life time opportunity for buyers.

On the market: Located near the Richmond-San Rafael Bridge, Red Rock Island is accessible by boat or helicopter. It's a notable local landmark, currently owned by Brock Durning, whose family has held it for decades. The island is zoned for residential use, offering the potential for building a luxurious residence. Over the years, its value has fluctuated, with previous unofficial asking prices ranging from $5 million to $22 million.

A bit of history: The island was used for manganese mining in the 19th century, contributing to its reddish hue. It still houses abandoned mining tunnels. The island features a sandy beach, rugged shoreline, and trails leading to its grassy top. Though currently lacking electricity and running water, modern amenities like desalination and solar panels could be introduced.

Does it pencil? Developing Red Rock Island faces considerable challenges, including the logistics of material transport, its steep terrain, and the need to comply with various county and San Francisco Bay Conservation regulations. Despite these hurdles, the island's potential for either preservation or development presents a unique opportunity, particularly when contrasted with San Francisco's median sale price of $1.4 million as of October.


Big picture: This sale represents a rare chance to own a piece of San Francisco's natural heritage. Red Rock Island offers a blend of isolation, natural beauty, and development potential, poised between preserving its untouched state and transforming into a bespoke luxury residence. The decision of the future owner will determine whether this unique landmark remains a natural wonder or becomes a symbol of opulent living.


In October, U.S. office market debt hit $920 billion, per CommercialEdge analysis of 80,000+ properties. Manhattan led with $174.5 billion, nearly three times Los Angeles at $60 billion. Smaller markets like Raleigh-Durham and Nashville had lower debt, around $7 billion each.

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*The Sponsor’s assumptions and projections (collectively “Projections”), including target IRR, target cash-on-cash, and target equity multiple (“Targets”), are hypothetical, are not based on actual investment results, and are presented solely for the purpose of providing insight into RM Communities’ investment objectives, detailing its anticipated risk and reward characteristics and for establishing a benchmark for future evaluation of the Sponsor’s performance. The Sponsor’s Projections and Targets are not a predictor, projection, or guarantee of future performance. There can be no assurance that Projections or Targets will be met or that the Sponsor will be successful in meeting these Projections and Targets. Forward-looking statements, including  Projections and Targets, are inherently subject to a variety of risks and uncertainties, and the actual results achieved may vary significantly and materially. All of the information in this message is qualified in its entirety by reference to the more complete information about the offering contained in the relevant offering documents, including the relevant private placement memorandum, operating agreement, and subscription agreement (“Offering Documents”), which should be carefully reviewed prior to any investment, including disclosures relating to forward-looking statements and “Risk Factors”. Forward-looking statements, including Projections and Targets, should not be used as a primary basis for an investor’s decision to invest. RM Communities does not provide any assurance of returns or the accuracy or reasonableness of Projections or Targets. Past performance is not indicative of future results.  This real estate investment is speculative and involves substantial risk. A loss of part or all of the principal value of your investment may occur. You should not invest unless you can readily bear the consequences of such loss. For additional information on risks and disclosures visit

Nothing in this message should be regarded as investment advice, either on behalf of a particular security or regarding an overall investment strategy, a recommendation, an offer to sell, or a solicitation of or an offer to buy any security. Advice from a securities professional is strongly advised, and we recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any real estate investment.

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