Business & Market Report - June 2024

OFFICE LOAN DEFAULTS NEAR HISTORIC LEVELS

BILLIONS ON THE LINE     

Currently, more than $38 billion worth of office buildings in the US market are in a very vulnerable position. These projects are either in default, foreclosure or in some form of hardship, according to data firm MSCI. To put this in perspective, you’d have to go back to the 4th quarter of 2012 to find a dimmer picture.

In 2023, 35% of Commercial Office Building owners had the worst payoff rate in the history of the data that goes back to 2007. “It’s a pretty stark change,” said Matt Reidy, director of Moody’s commercial real estate economics.

Today’s high interest rates are particularly problematic because commercial property owners typically borrow at least half of a building’s cost. Most of the mortgages coming due now were made when interest rates were much lower than now.

In a normal office market, many landlords could pay the higher rates. But since Covid-19, the office market has been nowhere near normal. The demand for office space post Covid-19 has been in a spiral as many businesses are allowing their employees to work from home as a benefit and have now reconsidered the amount of workspace they need. Moody’s projects that 73% of loans will be difficult to refinance because of the properties’ income, debt levels, vacancies, and soon approaching lease expirations.

As we mentioned in August 2023, your local market is probably getting more competitive “If your End-User Market Segmentation has been weighted more toward Residential and Commercial segments, you are feeling the squeeze from the Ready-Mix industry attempting to retake territory and market share.”

Out of the 53 office markets monitored within the Office Market Cycle Analysis, more than half are in a Hyper-supply or a Recessionary position! This, of course, results in much fewer large commercial office concrete projects. As we’ve discussed in prior alerts, the Private Commercial concrete poured annually makes up 31% of all concrete poured in North America. This is a substantial negative influence on the entire concrete market, which is creating a high level of rivalry and competition among Ready-Mix producers as they scour the market to replace their lost concrete volume. The only measure for a volumetric concrete mixer producer to employ against this shift in both today’s market and the continuing trend for the near future is to reduce exposure to the Private Commercial segment. There are ways to reduce your exposure.

A couple of ways to reduce your exposure would be to conversely increase exposure to the Infrastructure/Public Works segment while also surgically carving out opportunities to provide value-added products and services within the Residential segment as well as the Private Commercial segment. Think about creating new value added and unique products that are proprietary to you and your company in addition to specialized services that set you apart from the competition. However, once you develop these differentiable products and services the only way to execute these strategies is via a well-disciplined and professional sales team which must be led by a consistent and disciplined sales management process. These are serious shifts in the market that some companies may not survive, so all volumetric mixer concrete producers need to beware!

Are you prepared to fend off these challenges? As we have stated in the past maybe you need an objective “look under the hood” to make sure your team is maximizing the opportunities. Give us a call to see how we can help you.