NEW YORK CITY—Whatever positives open-plan office spaces have for worker productivity and tenants’ bottom lines, they’re likely to put more pressure on owners and, by extension, the CMBS making loans in the sector. So says Fitch Ratings, which also notes that office led the way for CMBS defaults in 2013, the third consecutive year it has done so.
“According to a survey by CoreNet Global, companies allocated 225 square feet per employee in 2010,” says Mary MacNeill, managing director for CMBS at Fitch. That allocation fell to 150 square feet or less per worker by last year, a reduction of approximately one-third.
“This trend is expected to continue as open plans are optimized and other companies join the trend,” MacNeill adds. Fitch predicts the burgeoning trend will contribute to vacancies and hamper some landlords in re-leasing their entire spaces.
Even as the employment picture continues its gradual improvement, the more-efficient space utilization of open plans will keep absorption levels “muted,” according to Fitch. It cites figures from Reis Inc. showing that office vacancy was 16.5% at the end of last year, compared to 16.8% at year-end 2012 and 17.1% at year-end 2011.
The move toward open plans is occurring at what Fitch calls “a difficult time” for the office sector. Fewer CMBS loans backed by office properties went into default last year—141 vs. 172—but these represented 48% of the ’13 total at $2.6 billion.
That’s nearly twice as large a slice of the piece as retail. In addition, office’s share of the loan default pie was larger in ’13 than it was in ’12, when $3.3 billion of office loans defaulted, about 45% of the year’s $7.3-billion total.
Further, according to Fitch’s CMBS 2013 Loan Default Study issued earlier this month, office’s cumulative default rate reached 12.6% last year, compared to 11.7% in ’12, 10.3% in ‘11 and 7.5% in ‘10. “Office performance continues to lag that of other property types, which improved more quickly once market conditions stabilized,” the report states.
Among the new office defaults last year, 24 loans, representing 57% of the dollar volume for the sector at $1.5 billion, were greater than $25 million. Three loans were greater than $100 million, and included two portfolios: the $146.5-million COPT Office Portfolio in GCCFC 2007-GG9; and the $120-million Oasis Net Leased portfolio in BSCMSI 200-5-PWR10, in which nine of the 10 office assets were leased to single tenants and occupancy fell from 100% to 23% by the time the loan defaulted.
MacNeill says Fitch expects that office will continue to see “a mixed recovery as major metropolitan office markets continue to outperform secondary and suburban markets.” The firm’s loan default study notes that class A properties in major metropolitan areas will continue to push rents, “which may send some tenants looking to more affordable class B or suburban product.”
In addition to the trend toward open plans, “many office markets will continue to be hampered by unemployment, slow job growth and significant rent concessions,” the report states.”