Loans on Nearly 1 in 5 Class B Offices to Mature Soon. Where Are the Hotspots?  

Key Takeaways:  

• Loans on 19.4% of office properties will mature between 2023 and 2026 across all classes 
• At 29.8%, Atlanta has the highest percentage of soon-to-mature Class B office loans across the country 
• Denver’s 290 maturing Class B loans tied to 20 million square feet make up nearly two-thirds of all upcoming office debt in the metro 
• Loans on 25% of Pittsburgh’s Class B offices to face expiring loans, the highest percentage in the Northeast 
• By square feet, Chicago ranks third in the nation, with 25.5 million square feet of Class B office space subject to maturing loans between 2023 and 2026 

The once-stable office sector is still grappling with lingering challenges created by the pandemic, as remote work continues to gain permanence and office space demand continues to fall, driving vacancy rates to new heights.  

Weakened office fundamentals and a high-interest-rate environment have made investors and lenders wary of office assets, especially those considered to be functionally obsolete. The overall uncertainty has thus cast shadows on traditional refinancing strategies for properties approaching loan maturity. 

Once a routine phase in the real estate cycle, maturing loans have become a potential catalyst for significant disruption in the market. Nationally, loans on 19.4% of office properties — encompassing 1.3 billion square feet — will reach maturity between 2023 and 2026, our data on loan maturities shows.  

Percentage of Maturing Loans Per Year (All Classes)

Atlanta (35.7% of its total stock), Pittsburgh (27.2%) and Denver (27%) are among the office markets with the highest percentage of office properties with maturing loans between now and 2026. By total square footage, metros with the most maturing debt are Washington, D.C., (86.4 million square feet), Manhattan (85.5 million) and Los Angeles (75.6 million). 

Given current conditions, a surge in defaults continues to loom, but the specific extent remains unclear. The scale of distress will depend on market-specific conditions, and factors such as building class and location, individual property performance and the existing interest rate on the loans.  

Flight to Quality Drives Class B Office Woes 

Nonetheless, while the spike in office mortgage delinquencies will depend on a host of factors, Class B assets are in greater danger of defaulting due to due to the ongoing flight-to-quality trend that favors Class A spaces. As a result, Class B properties are facing an uphill battle in attracting tenants and maintaining competitive rental rates.  

Nationwide, loans on 18.1% of Class B assets — encompassing 594.2 million square feet — will reach maturity by the end of 2026.  

Examining the top 25 office markets in the U.S., some locations will inevitably be hit harder than others: At least 12 markets have a higher percentage of Class B assets with maturing loans between 2023 and 2026 than the roughly 18% national average. Leading the pack is Atlanta, where a substantial 29.8% of its existing Class B inventory is nearing loan maturity.  

Denver and Pittsburgh are close behind, with 26.1% and 25% of their respective Class B office spaces close to their loan due dates. The pressure is also mounting in Orange County and Houston, as they grapple with the approaching loan maturity of 23.8% and 22.9% of their Class B offices.  

Class B Maturities by Metro 2023 –2026 

And while other markets may have lower percentages of Class B office assets with loans maturing by the end of 2026, they nevertheless have vast amounts of space that fall in this category. Among such markets Washington, D.C. stands out with 31 million square feet of Class B office space nearing loan maturity. Close behind, Los Angeles has 27.5 million square feet in the same situation, followed by Chicago with 25.5 million square feet. 

Atlanta Has Highest Percentage of Class B Stock with Soon-to-Mature Loans in the U.S.  

Out of the eight Southern markets examined for this report, six had a higher percentage of maturing Class B office loans than the 18.1% national average. In Atlanta, that figure stood at 29.8%, the highest among the country’s leading office markets. The metro's vacancy rate has also consistently stayed among the country’s highest, closing August at 18.7%. 

Atlanta’s leasing activity in recent months has also been a prime example of tenants’ preference for Class A office spaces. The most significant move-ins all involved tenants upgrading to newer, higher-class assets, according to a second quarter report from JLL. For example, Sage Software signed a 57,000-square-foot deal at Jamestown’s 619 Ponce, a timber office building underway on Atlanta’s BeltLine.  

While Atlanta has the highest percentage of Class B office space with an expiring loan between now and 2026, Washington, D.C. has the largest amount at 31 million square feet, accounting for 21.2% of the market’s existing Class B stock. Although the metro’s 15.3% vacancy rate was below the 17.5% national average in August, leasing activity in the Class B segment has been sluggish in the past few quarters, adding to owners’ woes.  

According to Cushman & Wakefield research, Class A buildings accounted for 80% of new leasing activity in Washington, D.C., while Class B and Class C assets accounted only for 14% and 5%, respectively.  

Meanwhile, our analysis found that the market has 348 Class B office loans with due dates between 2023 and 2026, accounting for 53.2% of all office loans in the market. Next year is anticipated to be the most challenging year for Washington, D.C., as 7.2% of Class B office properties — encompassing 10.5 million square feet of office space — will be subject to maturing loans.   

Tech-Driven Denver, Seattle to Face More Challenges from Class B Loans  

In the West, markets with the highest percentage of maturing Class B office loans include once-thriving tech markets disproportionately impacted by the pullback of tech firms. Denver is currently leading the region, with 26.1% of its stock subject to loans on Class B spaces due between 2023 and 2026. Specifically, the 290 maturing loans tied to 20 million square feet of Denver's Class B office space make up nearly two-thirds of all upcoming office debt in the city. The market may also face additional distress due to its high vacancy rate, which stood at 20.8% in August.  

Seattle is another tech market grappling with high vacancy rates (22.4% in August), and a significant portion (19%) of its Class B office space approaching maturity between 2023 and 2026. As things stand, it appears that 2024 and 2025 will be the most challenging for the market, with 5.3% and 7.3% of Seattle's Class B office loans reaching maturity. By comparison, only 2% of debt is due this year and another 4.4% will reach maturity in 2026.   

The outlook might be less pressing for Western markets like San Diego and the Bay Area (excluding San Francisco), which have a lower percentage of Class B office stock subject to maturing loans between 2023 and 2026: 14.1% and 16%, respectively. Their thriving life science sectors could also contribute to San Diego and the Bay Area (Solano, Contra Costa, Alameda and Santa Clara counties) having an easier time in the near future.  

Class B Loan Maturities by Metro/Vacancy Rate, 2023 – 2026 

Chicago Has Country’s Third Largest Square Footage of Class B Office with Loans Due by the End of 2026 

Chicago, the Midwest’s leading office market, could face some of the hardest challenges when it comes to maturing Class B loans. A total of 19.6% of the metro’s Class B office stock — accounting for 25.5 million square feet of office space — has loans due between 2023 and 2026. The Windy City’s overall vacancy rate stood at 17.8% in August, in line with the 17.5% national average.  

Meanwhile, 17.3% of the Minneapolis – St. Paul market’s Class B office inventory is also set to face expiring loans by the end of 2026. Specifically, the 154 Class B office notes due between 2023 and 2026 represent 67.8% of the city’s maturing office debt. 

Additionally, both the Twin Cities and Chicago continue to register some of the most affordable listing rates among the country’s leading office markets, closing July at $27.21 per square foot and $27.54 per square foot, across all office classes, respectively. The lower asking rates will add additional challenges for owners looking to refinance their maturing loans. 

One Quarter of Pittsburgh’s Class B Offices to Face Expiring Loans 

In the Northeast, Pittsburgh has the highest percentage of Class B offices subject to maturing loans between 2023 and 2026, with 25% of space affected. A total of 7.7 million square feet of office space will be impacted by expiring loans between 2023 and 2026, with 2025 and 2026 expected to be the most challenging years, as 7.8% and 8.5% of loans are set to mature in that timeframe. 

The flight-to-quality trend remained persistent in Pittsburgh as well: In the first six months of the year, 55% of new leases were signed in Class A office spaces, a recent CBRE report revealed. In this tenant-favored market, Pittsburgh businesses also continue to take the opportunity to upgrade and reinvent their workplaces to attract employees back to the office.   

While Pittsburgh has the highest percentage of Class B office space subject to maturing loans between 2023 and 2026, Manhattan, unsurprisingly, has the largest volume of Class B office space facing the same challenges with a total of 25.3 million square feet.  

On top of that, a recent Bloomberg analysis found that around 90% of the city’s office stock is over 20 years old. With Manhattan’s overwhelmingly vintage office stock and a strong flight-to-quality trend, the market might face some additional challenges in the near future. 

However, some assets might find a silver lining amid the ongoing economic headwinds with the recently announced Manhattan Commercial Revitalization Program. The initiative offers property tax abatements of up to 20 years to owners who renovate aging office buildings south of 59 Street in Manhattan.