Office loans have become a major driver of delinquencies in the estimated $4.6 trillion market for outstanding commercial real estate debt, according to the Mortgage Bankers Association.
The trade group said office-loan delinquencies hit 6.5% in the fourth quarter of 2023, up from 5.1% three months before, when looking at loans 30 days or more past due.
“Long-term interest rates have come down from their highs of last year, which should provide some relief to some loans, but many properties and loans still face higher rates, uncertainty about property values and — for some properties — changes in fundamentals,” said Jamie Woodwell, MBA’s head of commercial real estate research.
In the early part of the pandemic, the lodging sector saw delinquencies surge to a 20% rate of the unpaid principal balance of property loans, while office loans were stable with delinquencies of less than 3%.
The MBA started its CREF loan performance survey in April 2020 as the nation was undergoing COVID lockdowns. Its latest survey was based on participants reporting on $2.7 trillion of loans in December, or about 58% of the estimated balance of outstanding U.S. commercial real estate debt.
Since October, the benchmark 10-year Treasury yield
has quickly retreated from a 16-year high of 5% to about 4.06% on Tuesday, on expectations that the Federal Reserve will be pivoting to rate cuts in the months ahead.
Still, office loans were largely underwritten at some of the lowest interest rates of the past decade. BofA Global analysts estimate there’s about a gap of 200 basis points between maturing Wall Street loans that were packaged into bond deals and newly underwritten loans.
Even under their most “optimistic case” of a 5% weighted average coupon, roughly 15% of conduit loans maturing in 2024 would fail to refinance without an equity infusion, the BofA Global team said, in a Friday note to clients.
Related: ‘No one is throwing good money after bad.’ Why 2024 looks like trouble for commercial real estate.
Stocks closed lower on Tuesday as Treasury yields climbed, with the Dow Jones Industrial Average
shedding 231 points, or 0.6%, the S&P 500 index
closing 0.4% lower and the Nasdaq Composite Index
ending down 0.2%, according to FactSet data.