Recent reports indicate a major shift in the commercial real estate landscape. Default rates on commercial loans are surging as lenders are no longer playing the “extend and pretend” game—the practice of hoping demand and property values will simply rebound to pre-pandemic levels.

Specific to office buildings, industry analysts are noting a fundamental change in perspective:

“Lenders, to office owners in particular, are also concluding that the decline in property values and cash flow aren’t simply a response to the economic cycle. Rather, creditors increasingly believe that structural changes around the workplace and hybrid work have permanently reduced demand for most office space.”

What This Means for Office Tenants

The impact of this shift isn’t the same for everyone. While Class B buildings are currently in the highest danger of loan distress due to the “flight-to-quality” trend, even some Class A buildings are seeing non-performing loans. The solution for tenants is to think further ahead and ask deeper questions before signing a lease.

The Essential Due Diligence Checklist

When considering your next lease term, you need to look beyond the floor plan. Ask these critical questions about your current or future building:

• Financing: What financing is currently in place for the building? When does the loan expire?
• Operations: Can the landlord afford to pay property managers, landscapers, and maintenance crews?
• Improvements: Can the landlord afford to pay tenant finish contractors? Is there capital set aside for your leasing agent’s commission?
• Obligations: Can the landlord afford the property taxes? Are they in a position to protest those taxes if they become unwarranted?

The market is shifting, and the financial health of your landlord is now just as important as the quality of the lobby. If you’d like to better understand how lender pressures could affect your current or future space, contact Wally & Co.

We’ll help you ask the right questions and ensure you negotiate from a position of strength.