Office Delinquencies Double Year-Over-Year

CMBS office delinquencies have hit their highest levels in over a decade, reflecting the seismic shifts in office demand fueled by hybrid work trends.

Jordan B.
November 18, 2024

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Good morning. As hybrid work reshapes the office market, delinquencies in CMBS office loans have hit their highest levels in over a decade.

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👉 Your perspective matters! Take 4 minutes to share your thoughts on the CRE market's pulse in the Q4 2024 Fear and Greed CRE Survey.

Market Snapshot

S&P 500

GSPC

5,870.62

Pct Chg:
-1.32%

FTSE NAREIT

FNER

805.88

Pct Chg:
+0.31%

10Y Treasury

TNX

4.461%

Pct Chg:
+0.035

SOFR

30-DAY AVERAGE

4.844

Pct Chg:
0.0%

*Data as of 11/15/2024 market close.

OFFICE MARKET

Office CMBS Defaults Surge as Hybrid Work Reshapes Demand

CMBS office delinquencies have hit their highest levels in over a decade, reflecting the seismic shifts in office demand fueled by hybrid work trends.

What happened: Delinquencies in CMBS conduit loans tied to U.S. office properties rose sharply to 10.35% in October, up 56 basis points from the prior month and more than double the rate from a year earlier, according to Moody's Ratings. This marks the highest level since August 2012.

Key drivers: Moody's reports that a wave of defaults stems from high refinancing rates coupled with declining property values. Office loan refinancing rates hover at 41.5%, well below the CMBS average of 58.7%, as 10-year Treasury yields exceeded 5% during critical refinancing periods. CRE property values have declined 10.7% since mid-2022, with office and multifamily sectors experiencing sharper drops of 23% and 19%, respectively.

Aging loans: Older CMBS loans—originated between 2011 and 2014—are particularly at risk, with delinquency rates ranging from 55% to 62%. Meanwhile, newer loans from 2016 and 2017 maintain healthier delinquency rates below 5%. Notable defaults this month include $200M on NYC’s Prince Building, $200M on 500 Fifth Avenue, and $99.5M on CityPlace in St. Louis.

➥ THE TAKEAWAY

Zoom out: AI and tech are boosting office leasing, but hybrid work's 14-22% demand drop still weighs heavily. Expiring leases are cutting revenue potential by up to 22%, leaving sponsors to face prolonged refinancing challenges through 2027.

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✍️ Editor’s Picks

Perspective: JLL CEO Christian Ulbrich predicts steady CRE deal activity despite rising interest rates, with residential and hotels leading recovery.
Art + RE: Integrating art into real estate projects boosts their appeal reports TRD, with curated collections adding cultural cachet, lifestyle value, and faster lease-ups.
Housing inflation: Federal Reserve Chair Jerome Powell warns housing inflation could remain elevated until mid-2026, as limited turnover in rental markets slows its normalization in the CPI.

🏘️ MULTIFAMILY

Rent surge: Manhattan rents hit $4,295 in October, a three-month high, as soaring mortgage rates push more would-be buyers into renting.
Strategic expansion: Conserve Holdings enters the Richmond market with the acquisition of The Spectrum Apartments, bolstering its Virginia portfolio and pursuing value-added growth opportunities. (sponsored)
Momentum: Multifamily cap rates rose to an average of 5.9% in 2Q24, up from 5.5% in 2Q23, signaling a recovery in investor activity.
Student expansion: Gilbane and CBRE form a JV to recapitalize nearly 3,000 beds across six Power 4 school properties, blending operational and development projects.
Housing shortage: Southern California apartment rents are projected to grow 3% to 7% by mid-2026, with the Inland Empire leading the region.
Rezoning risks: L.A.’s rezoning plan to boost affordable housing may displace tenants in rent-controlled units, sparking concerns over tenant protections and housing stability.

🏭 Industrial

Funded: PGIM Real Estate provided $120M for Stonepeak's acquisition of a 1.8M SF industrial portfolio near Jacksonville’s port, reflecting strong investor confidence in transit-focused assets.
Sun Belt Storage: Madison Capital launched a $250M fund targeting self-storage acquisitions and development, focusing on value-add opportunities in Sun Belt growth markets.

🏬 RETAIL

Longer leases, smaller stores: Retailers are signing longer leases for smaller spaces, often repurposing stores as last-mile delivery hubs to meet rising e-commerce demands.
Consumer strength: U.S. retail sales climbed 0.4% in October, driven by robust spending on autos and electronics, highlighting consumer resilience amid high prices.
Prime purchase: Empire State Realty Trust finalized $195M in retail acquisitions on Williamsburg’s North Sixth Street, securing prime spots in Brooklyn’s bustling shopping district.

🏢 OFFICE

Silicon Beach loan: Blackstone issued a $197M loan for Lincoln Property and Strategic Value Partners' acquisition of The Bluffs, a 500,000-SF Playa Vista office campus.
Tech surge: Tech now leads U.S. office leasing at 18%, driven by AI development and venture-backed startups, despite hybrid work trends.
In trouble: Trump's return to office could reshape D.C.’s commercial market, with workforce cuts threatening office demand but return-to-office mandates potentially aiding landlords.

🏨 HOSPITALITY

Election slump: U.S. hotel performance dipped during the first week of November as Election Day prompted a 3.5% year-over-year decline in RevPAR, driven by reduced occupancy and stagnant average daily rates.

A MESSAGE FROM RE-LEASED

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📈 CHART OF THE DAY

The chart highlights how active fund managers’ allocation adjustments can significantly influence smaller sectors' index weights, with even slight changes having a greater relative impact than large shifts in more heavily weighted sectors.