Office CMBS Payoffs Increased to Start 2024 as $1.15B Came Due: Report

CMBS office debt was paid off at an increased rate to start the year, but a deeper look at the data behind the maturities suggests deeper issues at the heart of commercial real estate’s most troubled asset class. 

A new report from Moody’s Analytics found that $1.15 billion of commercial mortgage-backed securities office debt reached its fully extended maturity date in January and February, with payoff rates reaching nearly 50 percent — an uptick of more than 15 percent from CMBS office debt payoff rates across 2023. 

However, Moody’s economists cautioned that last year’s putrid CMBS office payoff rate of 35 percent should not be discounted, despite the market now showing signs of improved payoff rates at the start of 2024. 

“It’s early in the year, so it’s hard to call it a trend, but it doesn’t differ a whole lot from the first two months of last year, as far as payoffs are concerned,” explained Matthew Reidy, Moody’s director of CRE economics and an author of the report. “I try not to get too excited about what I see two months into the year.  

“The market overall hasn’t shown any particular reason that we’ll continue the year at a much better pace than last year,” he added.  

While just over $1 billion (among 30 loans) in CMBS office debt matured in January and February, a whopping $17 billion in CMBS office debt is scheduled to mature through 2024, more than doubling 2023’s maturity total. 

“Last year we had $8.7 billion in CMBS office loans mature and about 35 percent of them paid off,” Reidy said. “This year we have doubled that number and the market really isn’t in a position to double the number of loans.” 

As for the uptick in payoffs made in the first two months, Reidy argued that, on the lending side, most lenders use up their allocation provisions by November and December, which leads them to push closings to January and February. 

“You’ll see an uptick for that reason,” he said. “[The conclusion is] more anecdotal than data driven, but, theoretically, it seems to make sense, and what we hear in the market would occasionally support that.” 

It’s not all roses, however, in 2024. Moody’s estimates that of the $17 billion in CMBS office loans due to mature this year, roughly 75 percent, or $13 billion, demonstrate two characteristics that make them “very difficult” to refinance: debt yield levels (in other words, cash flow) below 8 percent, and lease rollover rates (the amount of space currently vacant or rolling into vacancy within three years) exceeding 25 percent. 

“These numbers indicate that [these loans] can see cash flow decline significantly,” said Reidy. “And lenders aren’t keen on learning when a property isn’t likely to lease and has already lost several large tenants.”  

Loan size was another important aspect of the data emphasized by Moody’s. 

Since the start of the year, two CMBS office loans above $100 million matured — one paid off, one did not — and all three CMBS office loans between $50 million and $100 million paid off. But for the 16 CMBS office loans between $10 million and $50 million that matured in January and February, only five paid off while 11 did not, a default rate of 69 percent. By comparison, of the 75 CMBS office loans between $10 million and $50 million that matured in 2023, 51 percent paid off at the maturity date, exhibiting a default rate of 49 percent, according to Moody’s.  

Amid the various data points, the only thing certain is that it’s unclear whether 2024 will mirror the performance of 2023 in office CMBS. 

“Sixty-five percent of what came due last year didn’t pay off, and of those loans 30 percent secured official extension with their lender, and the other 35 percent are just hanging out there in special servicing,” explained Reidy. “It’s a bit of a mixed bag.” 

Brian Pascus can be reached at bpascus@commercialobserver.com