Bond market reflects jitters about wall of maturing office REIT debt

By Joy Wiltermuth

U.S. bonds have been reflecting growing unease about a wall of debt coming due for select owners of office buildings

U.S. bonds have been reflecting growing unease about a wall of debt coming due for select owners of office buildings.

Selling pressure has been particularly acute in bonds issued by real-estate investment trusts that are major office landlords, including Boston Properties Inc. (BXP) and Kilroy Realty Corp. (KRC), according to data compiled by BondCliQ Media Services at the request of MarketWatch.

Bonds issued by Alexandria Real Estate Equities Inc. (ARE), Hudson Pacific Properties Inc. (HPP) and Vornado Realty Trust (VNO) also have seen selling off over the same period.

The REITs didn't respond to requests for comment.

Pressure on office REIT bonds comes as debt has gotten more expensive and scarce at the property level, with many U.S. companies still working to rationalize their office space nearly four years since the onset of the pandemic.

Bond giant Pimco said it sees opportunities in lending both at the asset and holding-company level in commercial real estate, which is "the most severely dislocated" since the 2007-2008 global financial crisis.

"To be sure, the current dislocation derives from the capital markets," a Pimco team led by portfolio manager Jamie Weinstein wrote in a client note earlier this week. "Rising interest rates have compressed valuations, induced ongoing financial market volatility, and curtailed liquidity in public and private debt and equity."

This BondCliQ chart shows an overview of office REIT debt coming due by maturity, with blue and red blocks representing corporate bonds coming due the soonest.

Morgan Stanley analysts this week estimated that REITs have about $124 billion of combined corporate debt maturing through 2025, which carries a fairly low average interest rate of 4.1%. Office building owners face one of the biggest looming refinancing needs.

Outside of record-high vacancies in the office sector, a major problem for commercial properties is higher borrowing costs, given that the Federal Reserve has jacked up its policy rate to a 22-year high of 5.25%-5.5% as it works to bring inflation down.

For REITs, that likely means significantly higher 10-year borrowing costs of about 6% or more, versus the roughly 4% rate on debt coming due, according to the Morgan Stanley team, which also expects interest costs to increase by $24.7 billion to $27.1 billion as maturing debt is refinanced.

For context, the increase would be roughly the size of NASA's 2024 budget request.

On the flip side, mortgage REITs that can benefit from the ability to charge borrowers higher interest rates finally look attractive, according to billionaire investor and Pimco co-founder Bill Gross.

Benchmark 10-year Treasury yields BX:TMUBMUSD10Y were edging higher on Thursday, up 6 basis points to 4.32%, but still were below the 5% highs of October as investors increasingly see easing inflation giving way to Fed rate cuts next year.

Stocks were mixed Thursday, but headed for big gains in November, with the Dow Jones Industrial Average DJIA up 8.1% for the month, the S&P 500 index SPX 8.4% higher and the Nasdaq Composite Index COMP advancing 10.2% in November, according to FactSet.

-Joy Wiltermuth

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11-30-23 1234ET

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