Although the much-anticipated wave of office distress has yet to materialize, new research from
Yardi Matrix shows that many markets are exposed to potential distress. The firm said debt service coverage ratios have declined for office properties in recent years, due to the two components of the ratio moving in opposite directions.

“As interest rates shot upwards in the last year-and-a-half, so did debt costs for commercial
real estate,” according to the Yardi Matrix report. “At the same time, cash flow has fallen—vacancy rates spiked as firms downsized or eliminated physical office footprints altogether—and expenses have grown.”

However, despite DSCRs’ downward movement, market-level average ratios show only a handful of markets exposed to widespread risk. In March, five of the 91 markets analyzed by Yardi Matrix had average DSCRs below 1.0: Brooklyn (0.81), Oklahoma City (0.89), Chicago (0.90), El Paso (0.92) and Cleveland (0.96). Another eight markets—including Manhattan (1.05), St. Louis (1.16) and Nashville (1.25)—sit at or below the 1.25 ratio required by most lenders.

The report points out, though, that “these market-level rates are only estimates, and DSCRs can vary vastly from property to property. Many properties within markets with low average DSCRs continue to perform well, while properties in markets with a high average DSCR face distress.”