Thursday, January 12, 2012

Rolled Over by Leases

The Wall Street Journal had a good, free article yesterday on the problems facing some office real estate, as leases signed at the peak of the real estate boom are expiring.  Landlords are faced with a market with lower lease rates:

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.
Offices that were purchased near the peak with a corresponding five-year mortgage have a compound problem.  It's difficult to refinance a mortgage when faced with lower rents and a higher vacancy rate.  The article states that defaults and foreclosures are rising for office space, and are expected to continue to rise, while real estate property types that able to adjust rents, like apartments and hotels, are seeing drops in foreclosures. 

The article lists major metropolitan markets like New York, Washington DC, and Boston as exceptions, as values in these markets have increased.   The article is worth reading and has plenty of examples.

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