The full toll of the Federal Reserve’s rate hikes on office buildings emptied by the pandemic isn’t yet being felt, according to Barclays.
Analysts at the investment bank said in a Wednesday client note that prices for office buildings already have dropped an estimated 20%-30% from peak levels, but that there is “likely more pain to come.”
“Office availabilities now exceed post-GFC peaks and will likely remain elevated, as long-dated lease terms have delayed the timing for firms to right-size their spaces,” wrote Lea Overby’s research team at Barclays, referring to the 2007-2009 global financial crisis.
Real-estate firm Savills tracked the national U.S. office availability rate at 24.4% in the second-quarter. Researchers there also warned of a “mostly oversupplied” office market and pegged office loans as already representing 34% of the total $72 billion of distressed commercial property debt at midyear.
A wave of maturing property debt has remained a key focus, with the Fed suggesting its policy rate could stay at a 22-year high of 5.25%-5.5% for some time. No change in that rate is expected Wednesday afternoon after the central bank wraps up a two-day policy meeting.
See: Stock and bond markets are watching the Fed for these ‘critical concepts,’ says BlackRock’s Rick Rieder
Still, properties loans are pegged to the 10-year Treasury yield
BX:TMUBMUSD10Y,
which was near 4.79% on Wednesday, after it last month briefly touched 5%, its highest in 16 years.
Higher borrowing costs come as another big $117 billion wave of office loans are slated to mature next year, with Savills expecting “more owners to give back their buildings to lenders as they are now underwater.”
Tighter financial conditions since the Fed began to dramatically increase interest rates as part of its inflation fight have triggered low loan payoff rates on maturing debt.
Delinquencies also have been climbing, with Trepp pointing to a 5.75% rate for office loans in bond deals at least 30 days past due in October, up from 1.75% a year ago, in a new report Wednesday.
“We expect a bifurcation, with prices for high-quality and well-located buildings falling around 40% from peak valuations, while distressed properties will likely trade based on land and redevelopment costs,” the Barclays team said.
Related: White House opens $45 billion in federal funds to convert offices into homes
Stocks were higher Wednesday ahead of the Fed decision, with the Dow Jones Industrial Average
DJIA
up 103 points, or 0.3%, the S&P 500 index
SPX
0.5% higher and the Nasdaq Composite Index
COMP
advancing 0.7%, according to FactSet.
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