Report: Office CMBS Delinquencies Double in One Year

A wave of office loan defaults is making things ugly in the commercial mortgage-backed securities (CMBS) space. 

Delinquencies in CMBS conduit loans secured by U.S. office properties increased 56 basis points since September to reach 10.35 percent, more than double where it stood at this time last year, according to a new report from Moody’s Ratings. 

This is the highest recorded level of office conduit loan defaults since August 2012. 

Conduit CMBS has seen overall delinquencies increase from 4.67 percent in October 2023 to 6.94 percent in October 2024, largely due to $1.93 billion of newly delinquent loans. Two asset classes were the main culprits, with approximately $831.1 million in office loans and $515 million in retail loans accounting for nearly 70 percent of these new delinquencies, according to Moody’s. 

Darrell Wheeler, head of CMBS research at Moody’s Ratings, told CO that office loan refinancing rates of 41.5 percent remain well below the overall CMBS refinance rates of 58.7 percent. 

“Thee third quarter of 2023 is when the delinquency rate started to go up,” he said. “So as [these loans] were coming due in the third quarter, which is the first time the 10-year Treasury hit 5 percent, we saw a lot of borrowers not refinance in that same time period.” 

Wheeler added that office sponsors have “a limited supply of potential finance options,” due to the increased interest rates and lower property values. Moody’s Ratings found that average U.S. CRE prices have fallen 10.7 percent since mid-2022, with average office and multifamily prices declining by 23 percent and 19 percent, respectively. 

“We expect that office, as more leases roll over, will have less NOI to show and it will be more challenging for some time to come for the office buildings to refinance,” said Wheeler.  

Due to the typical 10-year lease term on most office deals, CMBS loans originated in 2011, 2012, 2013, and 2014 have delinquency rates of 56.4 percent, 62.47 percent, 55.29 percent, and 60.17 percent, respectively, per Moody’s Ratings data. By comparison, CMBS office loans originated in 2016 and 2017 have delinquency rates less than 5 percent.  

Among the largest CMBS maturity defaults that have occurred in the last month are a $200 million loan secured by The Prince Building, a 12-story, mixed-use complex at 568 Broadway in New York City — COMM 2012-CR3, COMM 2012-CR4; a $200 million loan secured by 500 Fifth Avenue, a 60-story office tower in New York City — CSAIL 2015-C1, JPMBB 2014-C26; and a $99.5 loan secured by CityPlace, a 40 acre office complex in St. Louis — JPMBB 2014-C25. 

Wheeler said that hybrid-work is the main contributor to office defaults, as his research estimated that widespread hybrid work patterns have lowered office demand between 14 percent and 22 percent. 

“The office market hasn’t been performing with employment gains,” said Wheeler. “About 7.3 million jobs have been created since 2019, and the office market has just not responded to that, or at least how it traditionally would have, because of hybrid work.” 

“As these leases roll over from existing tenants, we’re seeing sponsors take 22 percent less potential revenue at lower leasing rates,” he added. “It’s lagging, and these maturities will continue to happen for the next three or four years.”

Brian Pascus can be reached at bpascus@commercialobserver.com