“They were good until suddenly they weren’t”: Office loan delinquencies explode past 2008 levels
October was one of the worst months on record for the U.S. office mortgage sector, with delinquency rates surging to historic highs and raising concerns about potential spillover risks for institutional investors worldwide.
Delinquencies on office mortgages securitized into commercial mortgage-backed securities (CMBS) jumped to 11.8% in October, the highest level ever recorded and well above the peak reached during the 2008 financial crisis, according to Trepp data cited by economist Wolf Richter.
“They were good until suddenly they weren’t,” Richter wrote, referring to the sharp deterioration in office CMBS performance over the past three years. For context, the delinquency rate was just 1.8% in October 2022 before skyrocketing to its current level.
The sector remains under pressure from pandemic-era disruptions that have proven anything but temporary, particularly the rise of remote work and corporate downsizing in urban business districts.
InvestorsObserver highlighted the trend back in July, noting that billions of dollars’ worth of office-backed CMBS loans were falling into delinquency each month.
Office vacancy rates have also soared. The Kaplan Group, a commercial collection agency, estimates that roughly 5.44 billion square feet of office space across the United States stood vacant as of the first quarter.
Although The Kaplan Group has suggested turning unused office space into apartments as a potential silver lining, InvestorsObserver noted that such conversions are often far more difficult in practice than they sound.
Who’s eating the losses?
As Richter noted, the banks that originated many of these office mortgages have largely avoided the fallout.
Instead, the bulk of the losses from soaring delinquency rates is being absorbed by CMBS investors, primarily institutional players, including bond funds, insurance companies, pension funds, and real estate investment trusts (REITs).
Bloomberg recently documented the turmoil at Lord Abbett & Co., a New Jersey–based private investment firm and major fixed-income manager, which suffered a $60 million loss on a CMBS tied to an office property in Kansas City.
In another blow, investors holding a $350 million commercial mortgage bond backed by Los Angeles’ Gas Company Tower lost nearly half its value late last year, underscoring the depth of the pain rippling through the sector.
Experts say older office buildings are bearing the brunt of the downturn, squeezed by rising costs and weakening demand.
Riaz Cassum, a managing director at Jones Lang LaSalle, noted that many single-asset, single-borrower deals now experiencing losses “were done at a different time in the cycle, when rents were higher, occupancies were stronger, and lease terms were longer.”
Today, cash flow on those properties has fallen sharply as vacancies climb and rental rates stagnate.