Thursday, June 22, 2023

Problem office loans are piling up in Chicago and Houston, but not yet in San Francisco"

From MarketWatch, June 20:

Key-card swipes don’t tell the whole story 

Chicago, Philadelphia and Houston have some of the highest percentages of problem office loans when looking at delinquency rates and other early warnings signs of trouble, according to a new report by Barclays.

That might come as a surprise, given that San Francisco has been making headlines for its broader commercial real estate woes, technology sector layoffs and struggles getting workers back to the office.

But so far, it’s other cities like Philadelphia with a 14% rate of office loans at least 30 days delinquent (see chart), or Chicago where 21.2% of its office loans facing imminent default, triggering a transfer of their debt to a “special” loan servicer (Sp. Srv).

***city comparison chart***

Researchers at Barclays based their findings on the performance of commercial property debt in metro areas with at least $2 billion of loans that were packaged into bond deals. They found that, “although there has been much discussion linking issues in the office sector with the very slow pace of return-to-office policies, we see very little correlation between performance of office collateral within various MSAs and Kastle’s weekly occupancy report.”

Kastle’s most recent Back to Work Barometer showed Houston with a 61.6% rate of physical occupancy, above the 50% 10-city average. San Jose’s rate was pegged at below 39%, while the San Francisco metro area was near 45%, when looking at card swipes at more than 2,000 office buildings in 138 cities.

But San Jose and Seattle were outperforming, both with no office loan delinquencies, few specially serviced loans or those on a watchlist for potential problems, according to Barclays.

“Given that tech companies have pulled back from office occupancy and many have embraced remote work, we believe that office delinquencies will continue to rise,” wrote Lea Overby’s credit research team at Barclays, in a Tuesday client note....