While there has been strong recovery in the office market driven by RTO initiatives, damage has already been done. This issue is greatest/most concentrated in class “B” & “C” office assets where landlords haven’t invested in the assets enough to make them most desirable to prospective tenants. While these assets/owners will suffer during the next few years, top quality assets will strengthen further and rents for those properties will continue to rise. Interesting times for sure!
Commercial mortgage-backed securities loan delinquencies have surged to their highest level since the pandemic, driven by record-high office defaults and tightening refinance conditions, according to a new report.
Office loan defaults hit a record high in the first quarter, climbing nearly 1 percentage point to 12.73% of the total outstanding balance, Moody’s Investors Service said. That translates to $939.8 million added to a total balance of $12.6 billion.
Borrowers are increasingly unwilling or unable to refinance office loans, compounded by ongoing market volatility, the bond-rating firm said. In the first quarter, 61% of maturing office loans paid off. That rate was down from 70% in the fourth quarter.
A look at CoStar CMBS data revealed office loans either delinquent or in default back 689 buildings totaling 127.2 million square feet, or 14.9% of U.S. office square footage.
Office properties in central business districts accounted for 177 of the buildings, totaling 61.5 million square feet with a 32.6% vacancy rate. Meanwhile, urban markets outside downtowns accounted for 152 buildings, totaling 25.8 million square feet with a 35.9% vacancy rate. And suburban markets accounted for 329 buildings, totaling 38.4 million square feet with a 35.1% vacancy rate.
Loans on 26 buildings, totaling 3.5 million square feet, were 30 to 60 days delinquent; 34 buildings, totaling 3.3 million square feet, were 60 to 90 days delinquent; and 129 buildings, totaling 24.2 million square feet, were 90 or more days delinquent.
The bulk of the loan defaults come from borrowers not paying off their debt by the maturity date — 301 buildings totaling 64 million square feet, according to CoStar data.
Of the buildings in default, 77 totaling 13.9 million square feet are in the process of being foreclosed upon; and another 122 totaling 18.3 million square feet are already real estate owned by the lender.
