Report: 80 Percent of CMBS Office Loans At Risk of Default or Workout in 2024
Moody’s Analytics study finds $5.6B of CMBS office maturities failed to pay off in 2023 and more are on the way in ’24
Roughly 80 percent of the $15.2 billion of commercial mortgage-backed securities (CMBS) office loans expected to mature this year are at risk of failing to refinance, according to a new report from Moody’s Analytics.
Moreover, approximately $5.6 billion in CMBS office maturities from 2023 were extended into 2024, of which $3.1 billion is either being worked out or has already defaulted.
The jarring status of CMBS office debt comes from a Moody’s Analytics report authored by Matt Reidy, Christopher Rosin, Kevin Fagan and Twinkle Roy. The economists found that only 35 percent of 2023’s $8.1 billion in office CMBS maturities were paid off at par, and 2024 is expected to experience similar rates of defaults or modifications as even more debt reaches maturity.
“It’s a big number, especially when you add that onto the maturities that were already scheduled for 2024,” Reidy, director of CRE research at Moody’s, told CO. “Everything is just sort of hanging out there and isn’t paying off.”
Unquestionably, size is the determining factor in whether a loan can be expected to be paid off at maturity. Of the 66 CMBS office loans below $10 million that matured in 2023, 88 percent were paid off at maturity; compare that to the 21 CMBS loans over $100 million that matured in 2023 and saw only 29 percent pay off at maturity.
“With a smaller loan size, there’s the potential that a borrower could come up with money to pay the loan off in cash, which is much less likely to happen with $100 million-plus size loans,” said Reidy. “In the general office performance data, we’ve seen smaller office loans perform a little bit better than large [central business district] office loans in the post-COVID environment.”
Approximately $3.1 billion in CMBS office loans were fully paid off in 2023; $2.5 billion of office CMBS was extended by special servicing operators; and $3.1 billion had no resolution and was either trapped in modification negotiations or in full default.
That 35 percent payoff rate is the lowest the CMBS office market has seen since 2009 – the nadir of the Global Financial Crisis – when only 37 percent of CMBS office loans were paid off. In 2022, even amid the rising interest rates, 78 percent of CMBS office loans were still paid off at maturity.
Between 2010 and 2002, the average CMBS office payoff rate was 78 percent, with a whopping 99 percent of CMBS office loans paying off at their maturity date in 2021, one year into the global pandemic.
“This was likely driven by multiple factors: Fed Funds was zero [percent] for the whole year, most CMBS maturities were 2011 loans which were low [loan-to-value] and almost all amortizing, tenants still felt comfortable financially to budget signing new leases, and there was some conviction that work-from-home was temporary,” according to the Moody’s report.
The 35 percent payoff rate for office CMBS in 2023 was dwarfed by other asset classes: Industrial CMBS saw 94.2 percent payoff rates, multifamily CMBS carried an 88 percent payoff rate, hotels 79.2 percent, and retail 65.5 percent. Only malls, at 50.4 percent, touched the same level of office distress in the CMBS space.
“Only thing that comes close is regional malls, which is not surprising given what we know about malls over the last 10 years,” said Reidy.
Moody’s noted that 2023 saw an unusual volume of office maturities take place. That $8.7 billion of maturities exceeded the 15-year average between 2007 and 2022 by 2.6 times. The breadth of maturity defaults is likely to be even worse in 2024 as the total amount of CMBS office maturities reaches a staggering $15 billion.
Moody’s analysts calculate that roughly $5 billion in fresh equity will likely need to be invested in the underwater CMBS office properties in order to balance the fragile debt yield on hundreds of these loans.
However, it remains unknown how much CMBS office distress will touch the greater economy, largely because of how isolated the CMBS investment universe is from balance sheet lending.
“It’s hard to say the extent that it’s contained to office loans and not the entire market,” said Reidy. “The effect on the economy will be pretty well contained. If it spills over and we start to see these types of payoff rates across the board, that probably signals problems for the greater economy.”
Brian Pascus can be reached at firstname.lastname@example.org