Office Delinquencies Set Records While the Rest of Commercial Property Steadies
The office loan delinquency rate in securitized pools passed 12% early this year even as overall commercial delinquencies flattened, leaving banks with a problem concentrated in one property type.
The commercial real estate reckoning that lenders have been bracing for since 2023 has arrived, but not as the broad credit event many expected. It is concentrated almost entirely in offices.
The delinquency rate on office loans in commercial mortgage-backed securities rose above 12% in January, a record for the sector, pushed higher by several very large individual loans moving into default. Meanwhile the overall commercial delinquency rate has flattened out near 4%, and delinquencies on loans held by banks and thrifts remain far lower — in the low single digits.
Why the distribution is so uneven
Securitized pools and bank balance sheets hold different assets. Banks kept the loans they underwrote to borrowers they knew, on properties in markets they understood. The securitization market absorbed larger, more standardized deals, including the trophy office towers that have proven hardest to refinance.
The result is that the headline delinquency figures most often quoted describe the part of the market where banks have the least exposure.
The structural, not cyclical, problem
Distress in offices is not driven by a downturn in demand that will reverse. Hybrid work reduced the square footage a given company needs, and that reduction shows up at lease renewal rather than all at once.
Lenders have adjusted their language accordingly. What was described in 2023 as a temporary dislocation is now underwritten as a permanent reduction in occupancy requirements — which changes the valuation, the loan-to-value ratio and the willingness to extend.
The refinancing wall
Roughly $936 billion of commercial mortgages mature this year. For well-performing industrial, multifamily and retail properties, refinancing is available, though at higher rates than the loans being replaced.
For offices, more than half of the roughly $100 billion in maturing securitized loans are considered unlikely to pay off at maturity. The alternatives are extension, restructuring, a capital infusion from the sponsor or handing over the keys.
What it means for bank earnings
Banks have been provisioning against this for two years, which is why the sector has absorbed the losses without the crisis some predicted. The pressure now is on regional lenders with concentrated exposure to a single metropolitan office market — a smaller group than in 2023, and one that examiners have been visiting frequently.
