Office landlords, who have been hit hard by the work-from-home revolution, are resorting to a last-ditch tactic in the real estate industry: “return the keys.”
In this case, the landlord will either stop paying the office building’s mortgage or refuse to refinance it. The bank or investor who made the loan will then foreclose on the building.
Some of the biggest names in commercial real estate, including Brookfield and Blackstone, have defaulted on their mortgages and have begun or completed the process of repossessing the keys to their office towers. This tactic reveals both the depth of the problems in the office market and the ability of big real estate companies to shift much of the economic pain onto others, in this case banks and other financial institutions.
Since the pandemic began, office workers have shown they can work from home, and many are reluctant to return. And companies realized they could save a lot of money by renting less office space, making many office towers unprofitable for their owners and turning many business districts into ghost towns. About 23% of office space in the U.S. was vacant or available for sublease at the end of November, compared with 16% before the pandemic, according to real estate services firm Avison Young.
Returning the keys is a drastic move, but it makes sense because it limits the landlord’s loss to the building.
Consider a real estate company that invested $25 million of its own money and borrowed $75 million to purchase an office tower for $100 million just before the pandemic. If the building’s tenant bleeds and is now worth $45 million, the value of the landlord’s initial investment may be reduced to zero, and the reduced rental income may not be enough to cover the cost of the building. There is a gender.
The landlord can decide to default on the loan rather than continue paying interest and other fees. This means the lender takes possession of the distressed building. And in theory, the lender could end up losing $30 million, the difference between the amount lent ($75 million) and the building’s resale value ($45 million).
Today’s return of keys is reminiscent of the term “jingle mail.” The term became infamous after the 2008 financial crisis when homeowners abandoned their homes and sent the keys back to the bank because the home was worth far less than they were worth. I owe a mortgage.
But there is a difference. Large real estate companies are able to continue operating after a default and are even considered adept at disposing of dilapidated buildings. But homeowners who stopped paying their mortgages took a big hit to their credit ratings and had to look for another place to live.
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