Washington-area office default risk surpasses that in San Francisco

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 per cent in the third quarter, topping San Francisco’s 71 per cent, real estate data firm Trepp reported.

The rate for Washington was 38 per cent at the end of 2022.

Seattle is the only other US metro area with more than 50 per cent of “criticised” 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.

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“Washington, DC, could be the new ground zero for office distress,” Buschbom pointed out.

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 decentralise out of the DC area”, Trepp said.

The real estate data firm added: “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.”

The office vacancy rate in Washington was 21.1 per cent in Q3, compared with 34 per cent for San Francisco, according to CBRE Group.

Landlords including Brookfield have defaulted on office loans in the Washington area. BLOOMBERG