While return to office is in full swing in most industries, 2024 still ended with a wave of loan defaults in the office sector. Refilling pandemic driven vacancies and the associated rental abatements/ concessions take time, so borrowers, particularly in the hardest hit office sectors haven’t been able to keep up with loan payments. Five large loans with a balance greater than $60 million were reported as newly delinquent in December, totaling $1.03 billion and accounting for 50% of overall new delinquencies and 81% of new office delinquencies, according to Fitch Ratings.
That drove the year-end office loan delinquency rate to 7.18%, up from 6.26% in November. The latest rate far surpasses delinquencies on other property types — the next two-highest being 3.96% for retail and 3.43% for hotels. Multifamily and industrial CMBS loan delinquencies ended the year at less than 1% each.
Fitch expects a slower climb in overall U.S. CMBS delinquencies in 2025, tempered by much improved leasing activity, better refinancing options, strong new issuance volume and increased loan modifications.
The bond rating firm is projecting that urban office refinance rates will jump to 36% to 40% for 2025 maturities — up from 11% in 2024. That should slow the rise in office delinquencies, Fitch said, but the rate is still projected to reach 8.4% this year and then peak at about 10.3% in 2026.
The largest loan Fitch listed as nonperforming in December was for $400 million on the Bank of America Plaza office property in Los Angeles, split into four different CMBS deals. CoStar News reported in July that the loan had moved into special servicing in anticipation of it not being expected to pay off at maturity.
What does this mean for office tenants? They will need to be extremely diligent in selecting a building. Landlord’s in or nearing default tend to lower service standards and have gaps in service that can significantly impact a corporate tenant’s ability to run their business smoothly.
Understand when the debt on candidate buildings is set to mature, if there are any active defaults and what the lender’s position will be on current tenants in a building with a landlord that is in default. These loans can also cover multiple assets, widening the impact and muddying the waters that would allow a prospective tenant to do good due diligence and make a well-informed decision. It will be interesting to watch play out.