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Cheap debt fueled a decadelong boom in U.S. office values, offsetting the impact of years of rent increases that didn’t keep pace with inflation.

Now that the long period of easy credit is over, office-building owners are bracing to see how much less their properties are actually worth.

The prices of some aging office towers in places such as New York and Chicago have already fallen by about a quarter as potential buyers struggle to land financing with interest rates rising fast, brokers and lenders say. Defaults are starting to move up from low levels.

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While rising rates and recession fears have also hit the value of stocks, bonds and other types of real estate, office owners are in a particularly bad spot. They are also grappling with the growing popularity of remote work, which has hurt demand for offices and pushed up vacancies. Office-leasing volume in the biggest U.S. cities in the third quarter was 40% lower than prepandemic levels, according to brokerage JLL.

“I believe that we are in the middle of a secular repricing of commercial real estate,” said Ronald Dickerman, president of real-estate investment firm Madison International Realty. “It’s a pretty scary proposition, but that’s what we’re up against.”

Cheap Debt Boosts ValuesOffice-building prices rose much faster than rents until 2021Source: Moody’s AnalyticsNote: Data covers the top 50 U.S. office markets. 1997=100
’05’10’15’201997200075100125150175200225250275300325350Effective-Rent IndexOffice-Price Index

The S&P 1500 Office REITs Sub-Industry Index is down 37.1% year to date, while the S&P 500 is down 18.2%. The gap is even wider going back to the start of the pandemic. Since Feb. 1, 2020, the S&P 500 is up 20.1%. Office REITs, meanwhile, are down 43%.

Still, the office sector was struggling with a supply glut and soft demand from tenants long before Covid-19. Low interest rates masked those problems, pushing values to record highs even as rents fell, brokers say. Cheap mortgages meant buyers of office buildings could afford to pay more. Low yields on Treasury bonds and other securities also made the rental income from office towers look more attractive in comparison, pushing up demand from investors.

Between 1997 and the end of 2021, effective office rents, which factor in free months of rent and other gifts to tenants, in the 50 biggest U.S. markets fell by 16%, adjusted for inflation, according to data from Moody’s Analytics. And yet office-building values rose by an inflation-adjusted 91% during that period.

“Low interest rates tend to trump fundamentals any day of the week,” said Doug Harmon, chairman of capital markets at brokerage Cushman & Wakefield.

Now, a surge in interest rates means more building owners are struggling to pay back their loans just as a wave of office mortgages signed during the boom years is set to mature.

More than $17 billion of mortgage bonds backed by office buildings come due in 2023, up from around $7 billion this year and just $4 billion in 2021, according to Trepp LLC. Lenders, worried about rising vacancies, are more reluctant to issue mortgages against office properties. That means many landlords have no choice but to borrow smaller amounts at higher costs, making it harder to pay off old loans.

Take the three-building Ashford office park in Houston. When Accesso Partners LLC bought the property in 2012, the real-estate investment company financed the purchase with a 10-year, $61 million loan at a fixed interest rate of 4.81% that matured in August, according to data from Trepp LLC.

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Accesso, unable to refinance the debt, defaulted. At the time of the purchase, the buildings were more than 90% occupied. Today occupancy is at 64%, according to the owner.

In July, Blackstone Inc. and co-owner RXR Realty signed a contract to sell this office building for around 35% less than its 2015 value.PHOTO: SAMIR ABADY/THE WALL STREET JOURNAL

Accesso’s managing partner Ariel Bentata said the company is “working closely with the loan servicer of the property to obtain more time to secure financing given challenging lending market conditions.”

Even in Manhattan, long considered a relatively safe investment, interest rates on typical office mortgages have risen from around 4% to around 6% since the start of the pandemic, said Dustin Stolly, co-head of Newmark Group’s debt, equity and structured-finance group. Many older office buildings are now the most difficult type of real estate to finance.

“There are far fewer lenders than there would have been prepandemic,” he said.

The outlook isn’t all bleak. Some modern, leased-up buildings are still selling at high prices. Property owners are less indebted than they were before the 2008 financial crisis. Lenders are also more willing to work with struggling borrowers, brokers say. That helps explain why foreclosures have been rare. Meanwhile real-estate investment funds are sitting on massive cash reserves, which should help support building values.

Still, some property owners are already seeing painful losses. In June 2015, Blackstone Inc. bought a 50% stake in the Manhattan office tower 1330 Avenue of the Americas in a deal valuing the 40-story building at $507 million. The deal’s so-called capitalization rate—a measure of the building’s annual profits divided by its value—was around 4%, according to a person familiar with the matter. At the time, the yield on a 10-year U.S. Treasury bond was around 2%. That made a return of 4% before debt look acceptable in comparison.

The 10-year Treasury yield was at around 4% as of Friday. That has pushed office cap rates up and property values down.

“Why buy a building at 4% if you can buy a Treasury at 4%?” said Ran Eliasaf, managing partner of real-estate investment firm Northwind Group.

In July, Blackstone and co-owner RXR Realty signed a contract to sell the building to Empire Capital Holdings for around $325 million—around 35% less than the building’s 2015 value.

“Traditional NYC office represents less than 1% of our portfolio, however, we continue to see strong tenant demand for new, best-in-class and highly amenitized properties like One Manhattan West,” a Blackstone spokeswoman said.

Write to Konrad Putzier at konrad.putzier@wsj.com

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