The Washington area has passed San Francisco for the highest share of office buildings with bank loans at risk of default, as US government employees continue to work remotely.
Loans of concern on offices in the US capital region climbed to 72 percent in the third quarter, topping San Francisco’s 71 percent, real estate data firm Trepp reported. The rate for Washington was 38 percent at the end of 2022.
Seattle is the only other US metro area with more than 50 percent of “criticized” bank loans, which Trepp defines as backed by properties with high vacancies, expiring leases, maturing debt, or other red flags for refinancing or repayment.
San Francisco’s office troubles have been blamed on a combination of the high number of tech employees working remotely and concerns about the city’s safety and quality of life. Washington’s woes are more protracted because the federal government is slow to respond to changing work patterns, and office demand could soften dramatically if government austerity measures kick in, according to Stephen Buschbom, a research director at Trepp.
“Washington, DC, could be the new ground zero for office distress,” Buschbom said.
Response to a return-to-office mandate for the federal government and General Services Administration “has been bleak, and time will tell if they will start to decentralize out of the DC area”, Trepp said. “If remote work is more of a permanent strategy for these government entities, there is a lot of excess inventory that could flood the market.”