Large Lease Rollovers Pose Loan Risks in Era of the Shrinking Office

Article by Costar Group

New Focus On Efficiency Portends Slower Demand

The trend in less square footage requirement per employee has serious implications for landlords with near-term lease rollover risk, according to new analysis from Wells Fargo Securities.

Older existing office leases initially written in the era using the higher square footage requirement per employee are likely to renew under a more efficient standard.

Looking at tenant data backing commercial mortgage-backed securities offerings, Wells Fargo found roughly 15.1 million square feet of lease rollover in 2013, 20.2 million square feet in 2014, 23 million square feet in 2015 and 19.6 million in 2016 for leases larger than 100,000 square feet.

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The trend toward space efficiency has the potential to limit office demand over the next several years as tenants right-size into less square footage as leases roll the next several years.

According to CoreNet Global, the square footage per worker has already slipped from 225 square feet in 2010 to 176 in 2012, — a 20% reduction.

Given those gains in efficiency noted in the CoreNet survey and other anecdotal evidence, Wells Fargo decided to alert CMBS investors of loans with large lease rollover risk.

One example that came up in its search was the $150 million loan on the three-building James Center in Richmond, VA. The loan is pari passu with a $100 million piece in GMACC 2006- C1 accounting for 5.9% of the deal and a $50 million piece in GECMC 2006-C1.

McGuireWoods law firm is the top tenant in the three properties leasing approximately 215,000 square feet in the 430,000-square-foot One James Center with a lease expiration of August 2015.

This past January, Clayco, a national development and building firm, announced a proposal to build Gateway Plaza, a new 15-story office building in downtown Richmond. McGuireWoods LLP and McGuireWoods Consulting LLC have agreed to become the anchor tenants of the new building.

That leaves the One James Center with 249,633 square feet of availability.

CMBS investors should monitor their portfolio’s exposure to tenant rollover risk, particularly for large leases that are more susceptible to downsizing as they come up for renewal in a new era of office efficiency, Wells Fargo Securities said.

Landlords have a desire to take advantage of low financing rates to refinance upcoming building loans, but need to show their building is stabilized, which pressures them to focus on tenant retention. Landlords unable to retain tenants or successfully accommodate current tenant needs may have a difficult time refinancing their building loans, the firm said.

Article by Costar Group – Original Article Found Here

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