More Pain Coming For U.S. Office Market: Prudential
What You Need to Know
- For Prudential, other property types have made up for the ongoing office building slump.
- A top executive expects high-quality commercial prices to fall to less than 60% of their peak value.
- The insurance company reported higher earnings on higher revenue for the fourth quarter.
A Prudential Financial executive predicted Wednesday that office prices will continue to drop before finally starting to recover.
Robert Falzon, Prudential’s executive vice chairman, estimated that prices for high-quality commercial properties have already dropped 16% since the current slump began and might bottom out at around 20% below the peak prices.
“Office, obviously, has corrected much more severely,” Falzon said. “Closer to 30% to date, and probably has another 10% to 15% yet to go.”
Office mortgages account for only about $8.4 billion of Prudential’s $721 billion in assets, and the strong performance of other types of commercial properties helped to increase the value of all properties in the portfolio by about 6% in 2023, Falzon noted.
What it means: Office buildings and their mortgages account for only a small portion of the investment portfolios supporting clients’ life insurance and annuities.
But life insurance company executives are in a good position to talk candidly about office market trends.
The office slump: The United States has about $6 trillion in commercial real estate loans of all kinds outstanding, according to the Financial Stability Oversight Council.
The U.S. office market is suffering from the lingering effects of the COVID-19 pandemic on office occupancy rates, tougher bank capital requirements and the effects of higher interest rates on efforts by property owners to replace existing mortgage loans with new loans.
Prices peaked in early 2022 and have been dropping ever since.
Analysts at Fitch estimated in late 2023 that only about half of the office building owners with mortgage loans maturing this year will be able to refinance their mortgages without getting loan modifications or other special arrangements.
Falzon’s view: Securities analysts, credit rating agency analysts and others have been eager to see what really happens when office building owners try to refinance mortgage their mortgages.
Falzon told securities analysts that about $2 billion of the commercial mortgage-backed securities in Prudential’s portfolio matured in 2023, and about $3 billion will mature this year.
In 2023, Prudential provided modifications for four of the borrowers, accounting for about $400 million in loan value.