Office Sector CMBS Delinquencies Spiked In December

A significant December spike in office sector CMBS delinquencies shows the sector is still reeling from the ongoing impacts of the COVID-19 pandemic, according to new analysis from Trepp.

Trepp’s overall CMBS delinquency rate increased last month for the first time in 18 months, with the office CMBS delinquency rate rising 72 basis points over the previous month to 2.53%. That’s the largest single month-over-month increase in office delinquencies since 2017, when the rate increased by over 50 points twice, Trepp’s Jack Forge says. 

The firm is currently tracking nearly $131 billion in interest-only office loans, citing parallels to mall property interest-only loans in the retail sector.  In a recent report, Trepp examined the parallels between maturing loans in each sector and questioned whether office could see the same fate as retail. 

“Given the latest office delinquency reading, it seems we may have been right to question whether the office is in a better position than retail,” LaForge says, noting that the firm is especially concerned by properties with a high loan-to-value ratio that are set to mature in the next five years and are posting declines in total revenue per square foot.

He cites the loan for 135 South LaSalle in Chicago as an example. The interest-only loan matures in 2025 and recently became 30 days delinquent. The building was just 23% occupied in Q3 of 2021, down from 86% before the pandemic. Bank of America, which had previously leased 800,000 square feet or 60% of the building’s NRA, recently announced plans to move out.

“The office sector’s resilience is due in part to its ability to lease property among a wide array of tenants, hedging risk against the sector’s broad demise,” La Forge says. “In this case, 135 South LaSalle did not benefit from an equal diversification of tenants. As Trepp recently noted, over the next five years, $7.6 billion of the single-tenant, full-term interest-only office building loans are set to mature. In 2020, many contractual rent steps were taken for large single-tenant occupied space that have meant their rental rates have not been adjusted due to new market rates. The single-tenant office market is significant in size, and this creates even more concentration risk for those properties. If the building owners are forced to take a haircut on the rental rates, the appraised values upon refinance are also going to be diminished and we could continue to see this threat come to fruition.”

Trepp data indicates that over the next five years, 42% of the full-term interest-only loans it’s monitoring in the office sector will mature, totaling $54 billion. Their fate, LaForge says, remains to be seen as companies revisit their return-to-office plans.

“In the months ahead, stories and trends of stress in the office sector are definitely worth monitoring,” he said. 

The spike comes amid reports that more companies are expanding their footprints than contracting.  The new research from CBRE indicates that tenants may have more long-term confidence in the market than would appear at first glance. Data from the first three quarters of 2021 shows that office tenants in major US markets shifted to more relocations and expansions and focused less on status-quo lease renewals and space contractions.