Commercial Property Is Stabilizing Everywhere Except Offices
The overall commercial delinquency rate has flattened near 4% as industrial, retail and multifamily loans perform, isolating the distress in a single property type.
The commercial real estate correction that began in 2023 has, for most property types, ended without the systemic event that was widely predicted.
The overall delinquency rate has flattened out near 4%, having ticked up modestly to about 4.02% in the first quarter. Beneath that average, industrial, retail and multifamily loans are performing largely as underwritten. Office loans are not: the delinquency rate on securitized office debt passed 12% in January, a record.
Why the rest recovered
Three property types benefited from structural demand that survived higher interest rates.
Industrial has been carried by logistics, and increasingly by the physical infrastructure of computing. Land near power and fiber has been repriced upward.
Retail — specifically well-located neighborhood centers — benefited from a decade of almost no construction. When nothing new is built, occupancy holds.
Multifamily absorbed an enormous wave of new supply with rising vacancy and flat rents, which hurt values but not, for the most part, payment performance.
Why offices did not
Office distress is structural rather than cyclical. Hybrid work reduced the amount of space a given employer needs, and that reduction is realized at lease renewal rather than immediately, which is why the deterioration has been slow and relentless.
Lenders have adjusted their language accordingly. What was described in 2023 as a temporary dislocation is now underwritten as a permanent reduction in demand.
The refinancing wall
Roughly $936 billion of commercial mortgages mature this year. For performing properties, refinancing is available at higher rates and lower proceeds — painful for equity holders, manageable for lenders.
For offices, more than half of the maturing securitized loans are considered unlikely to pay off at maturity. The resolutions are the familiar four: extend, restructure, inject fresh equity, or hand back the keys.
What it means for banks
Bank-held commercial mortgage delinquencies remain in the low single digits, far below the securitized market, because banks generally kept the loans they knew best. The concentration risk sits with regional lenders exposed to a single metropolitan office market — a group that examiners have been visiting frequently and that has been steadily shrinking through consolidation.
