Reaching an Inflection Point – Feb. 10, 2025
In a different commercial real estate environment, the volume of lease expirations in a given year might be considered pretty mundane as metrics go. Yet the sheer volume of expirations in 2025, as measured by Trepp in an analysis of properties backing CMBS loans, represents “a key inflection point” for the industry.
Some 265 million square feet of leases tied to CMBS are scheduled to roll this year across the industrial, office, retail, mixed-use and miscellaneous categories, according to Trepp data. Consider that this figure excludes properties that aren’t associated with CMBS loans, and it’s clear that commercial landlords will be working hard over the next 11 months.
Industrial leases represent more than one-third of that total at 100 million square feet, or nearly 11% of the total square footage in the CMBS universe. Office isn’t far behind with 85.5 million square feet of leases expiring between now and Dec. 31. Obviously, landlords in these two sectors have divergent prospects in the year ahead.
“When a lease reaches the expiration of its term, landlords face a wide range of possible outcomes including re-signing the existing tenant at a higher, lower, or equal rental rate; searching (and potentially improving the space) for a new tenant; or facing a period of extended vacancy,” writes Trepp’s David Wegman. “When they accumulate, lease expirations can mark a possible inflection point for cash flows from income-producing properties directly impacting investors, lenders and property owners.”
Tariffs or no tariffs, industrial has a smoother stretch of highway ahead than office does. The owners of warehouses, distribution centers and the like have enjoyed “significant pricing power” over the past decade, Wegman writes.
Although the momentum began to slow in 2024 as the market digested record deliveries which contributed to normalizing demand and rising vacancy rates, “fundamentals on the whole remain favorable and landlords generally welcome lease roll as an opportunity to reset below market rental rates to higher market rates,” he writes. That means steady increases in average rental revenue per available square foot, thanks to strong growth in rents.
For the office sector, the past few years have represented a paradigm shift. The COVID-19 pandemic temporarily kept workers in many industries homebound. However, unlike brick-and-mortar retail and warehouse operations, conducting office-using business is not necessarily contingent upon the employees being onsite.
That’s one of the main reasons that the pandemic-era “new normal” of working from home has remained sticky in many white-collar industries, despite widely reported return-to-office mandates at Amazon, JPMorgan Chase and other large employers. As a result, post-pandemic lease renewals have often meant reducing the tenant’s existing footprint by 10% or more. Trepp estimates that 2025 office lease expirations could add between eight million and 42 million square feet to the inventory of vacant space.
“Office is in the process of digesting excess supply in relation to diminished demand to find a new equilibrium,” writes Wegman. “From consolidation to downsizing of office space, the range of outcomes for office landlords is really an exercise of supply and demand; as investors and other market participants stand by waiting for the other shoe to drop on existing investments, and those on the sidelines wait for opportunities to emerge.”