Finance  ·  Analysis

Office CMBS Delinquency Reaches Highest Rate Since 2018: Report

Moody’s believes delinquencies will rise and refinancings will fall so long as interest rates remain high


The news continues to worsen for the nation’s troubled office sector.

A new report from Moody’s Ratings found that national CMBS office loan delinquencies hit 6.4 percent in April, the highest monthly average since 2018, when many 10-year loans negatively impacted by the 2008 Global Financial Crisis were still being worked out upon maturity. 

SEE ALSO: Distress Looms Over U.S. Offices Heading Into Summer: Report

Moreover, the office conduit/fusion CMBS refinance rate collapsed to 24 percent, after spending much of the last two years in the 50 percent range. The lack of repayments comes as the 10-year treasury rate hovers around 5 percent, one of its highest levels over the last 17 years. 

Darrell Wheeler, head of CMBS research at Moody’s Ratings, noted that the increased loan delinquencies and lack of repayments are indicative of widespread distress across the office sector that his firm had baked into their forecasts entering the year. However, Wheeler emphasized that even he has been surprised to see the distress emerge this quickly in 2024. 

“It is a market that over the last decade and a half has had a high delinquency rate,” he said. “Coming into this year we were suggesting that the maturities would drive delinquencies up there and through 6 percent, and we’re there now as of April, which is pretty fast.”

All told, the total CMBS delinquency rate for office and retail combined reached 5.37 percent in April, driven by $1.57 billion in newly delinquent loans ($665.8 million office delinquencies, $645.6 million in retail delinquencies). 

Wheeler believes the distress for office CMBS isn’t anywhere close to done, and that the 6.4 percent delinquency rate is threatened by interest rate uncertainty. Like the scale of Fortune, as interest rates rise, repayment rates drop and delinquencies rise, and vice versa.  

“It depends where rates are,” he said. “Given its history, [the delinquency rate] could go much higher.”

Office makes up roughly 25 percent of the total outstanding CMBS balance, according to Moody’s. Even amid the distress, the sector remains attractive to some lenders and issuers of CMBS securities, particularly those assets with decent debt yield metrics and healthy lease rollover portfolios, Wheeler said. 

“If you’re going to put an office loan into a CMBS securitization it has to be one that withstands investor scrutiny right now, which is highly cautious,” he said. “So they have to be very solid loans.” 

Perhaps most alarming, of the $1.57 billion in newly delinquent CMBS loans, a whopping 82 percent of them were maturity defaults, according to Moody’s.   

“We anticipated maturity rates would dominate the defaults in the coming year and they probably will as long as rates remain high,” said Wheeler. “82 percent feels like the right number because you’re always going to get some level of term defaults, but I can imagine it could go into the 90 [percent] stage. 

Maturity defaults are when the borrower fails to repay or refinance their CMBS loan at maturity, largely due to the balloon payment they’ve put off until the end of their loan’s lifespan, whereas term defaults are when a borrower fails to make their monthly interest rate payments.  

Wheeler said it’s that special servicers and lenders are more likely to resolve maturity defaults than term defaults. By the time their loan enters special servicing, the threat of losing a property increases, so sponsors quickly learn to make concessions in order to get an extension on their outstanding payment. 

“A lot of borrowers will try on the servicer to see what sort of modifications they can get and see if the terms are better than they can get in the open market,” he explained. “But then they realize in dealing with the special servicer that they may actually lose the property … so the resolution rates on a maturity default are usually pretty high.” 

Of the $662 million balance of the conduit loans that exited delinquency last month, $207 million were office and $181 million were retail. 

Even so, some of the individual distress numbers were eye popping. The three largest CMBS loan defaults in April all exceeded $170 million. 

A $250 million CMBS loan secured by 25 Broadway, an iconic, early 20th century Manhattan office building recently vacated by WeWork, was the largest maturity default across the nation last month. Other notable defaults included the Maine Mall, a $235 million retail loan default secured by a mall in South Portland, and 211 Main Street, a $170 million loan default secured by an 18-story office building in downtown San Francisco.  

Wheeler said the commercial real estate industry should get used to these types of default metrics in the months ahead. 

“We think this is what 2024 kind of looks like: you’ll see some months, as long as rates remain high, where the repayment rate drops, maturity defaults increase,” he said. “But for the most part, this is the trend we expect as long as the 10-year Treasury remains at current rates.”

“It’s a little bleak,” he added.  

Brian Pascus can be reached at