Owners of and investors in distressed office assets throughout the Mid-Atlantic are facing limited options as vacancy rates rise, interest rates remain elevated, and refinancing proves difficult if not impossible.
“We are seeing increased delinquency with commercial mortgage-backed securities (CMBS) loans, and what happens next is very clear, leaving precious little room for maneuverability,” explained Owen Rouse, Senior Vice President, MacKenzie Commercial Real Estate Services. “The building is transferred to the lender, then to a special servicer and, possibly, next to the auction house. Everything is extremely prescriptive. However, situations may take a different turn if the loan is controlled by a group with more flexibility, such as a life company or a bank. They are likely to modify the loan, provide the borrower with more time, or use creative tools in their toolbox to avoid owning the asset.”
Broadmead is converting a former three-building office park into 80 independent living residences and amenities in Baltimore County.
Rouse points to a recent example in which a large commercial office portfolio, facing foreclosure due to the exodus of tenants, entered special servicing and was subsequently sold to a new owner with a different game plan in mind. This featured the conversion of more than 220,000 square feet into 80 independent living residences and amenities, which represented a 180-degree flip from its original use.
“As conditions remain soft in the commercial office sector, I expect more building owners to seek more unique solutions such as this,” Rouse said.
The Mid-Atlantic region seems to be “ground zero” for CRE distress right now, and the broader economy isn’t making things any easier, said Marc Fischer, President and CEO of INSPIRE CRE. Between tariff uncertainty, a slowdown in GDP growth, and stubborn interest rates, some owners who were hoping to wait this out are running out of runway.
INSPIRE, together with The MacKenzie Companies, formed the Asset Adversity Group, a strategic alliance that combines INSPIRE’s distressed asset and receivership experience with MacKenzie’s full spectrum of commercial real estate services.
Fischer said Washington, D.C., is the most dramatic story in our market.
“Our nation’s capital already had a battered office sector, and then the federal government started shedding tens of thousands of jobs while GSA moved to terminate leases on millions of square feet. That’s a gut punch the market is still absorbing,” he said.
“The big CMBS-financed properties are in the hands of special servicers that spent years extending and pretending,” Fischer added. “Many are now moving aggressively toward foreclosure. The smaller loans – suburban office buildings, strip centers, mid-size apartment buildings that are serviced by community banks – are also under scrutiny. Regulators are increasingly forcing mid-market lenders to stop looking the other way and face the harsh reality that some assets on their books are distressed.”
Fischer does not foresee conditions improving before they get worse.
“Roughly $1.5 trillion in CRE loans mature through the end of 2026, and a lot of those borrowers simply can’t refinance at today’s rates,” he said. “That translates to more receiverships, more forced sales, and ultimately a real repricing of assets. The silver lining is that for buyers with cash and patience, this will be one of the better buying opportunities we’ve seen in a decade.”
Featured in this article: MacKenzie Commercial Real Estate Services, INSPIRE CRE.