While the massive interest rate hikes implemented over the course of last year by the Federal Reserve were touted as a way to bring down inflation, the move stands to have dire consequences across the economy in 2024.
According to the Mortgage Bankers Association, a host of office space owners across the United States are at increased risk of defaulting on loans that are set to be repaid or refinanced this year, typically under far less favorable terms than those of the original loan.
As office space continues to go unused following a widespread shift to remote work brought on by the pandemic, as many as 10 office buildings per month were on the verge of default as of July.
Vacant office space in the US is at its highest level ever of 18.7% 🚨
No rent is being paid on 1/5th of all US office space.
$46 billion of variable rate office debt will mature and need to be rolled this year — get ready for a wave of defaults on commercial real estate loans: pic.twitter.com/mBF9ApFH6P
— Joe Consorti ⚡ (@JoeConsorti) March 28, 2023
With roughly $117 billion worth of loans coming due this year, that default rate is almost guaranteed to increase significantly, potentially putting unsustainable pressure on banks, developers — and the broader economy. Analysts say the situation could tip the nation into a recession.
Roughly 40% of outstanding office loans are currently for properties that are no longer worth as much as the amount still owed on them. A report from Moody’s Analytics indicated that well over 200 loans are at a heightened risk of default when they come due soon because the properties are not bringing in enough revenue to pay the balance, which has been bloated due to interest rate hikes.
Even though the central bank has signaled that rates will moderate and begin to fall over the course of 2024, that is likely not going to be enough to save some particularly vulnerable properties, including Manhattan’s Seagram building.
When it was approved for a mortgage in 2012, developers expected it would make $74 million per year. Over the course of a decade, the closest it ever came to achieving that goal was in 2018 when it fell $5 million short. In 2022, it brought in just over one-third of that amount.
While recession predictions for 2023 did not come to pass, many economists maintain that it is still just a matter of time.
In a recent statement to Fox News, economist Harry Dent said: “Since 2009, this has been 100% artificial, unprecedented money printing and deficits; $27 trillion over 15 years, to be exact. This is off the charts, 100% artificial, which means we’re in a dangerous state. I think 2024 is going to be the biggest single crash year we’ll see in our lifetimes.”