Office CMBS Payoffs Are Up, but So Are Defaults

Those trying to understand what is happening with maturing CMBS loans won’t have an easy time of it, as the data is complicated and conflicting, according to an analysis for 2024 Q1 by Moody’s Analytics CRE.

Some things seemed better and others worse since the same period in 2023. All the loans examined were outstanding, not defeased, with either a fully extended maturity date in 2024 or an earlier maturity date modified to 2024.

Over the next 12 months, there are $18 billion in office CMBS maturities coming. But two of the loans collectively add to more than $1 billion, which means ultimately you could look at the total dollar amount or the number, as either would likely not be fully representative.

“Although this year started off bustling, offices maturities ebbed in March with only an additional seven loans with a total balance of $85 million, reaching fully extended maturity,” Moody’s analysts wrote. So, the total this year is $1.23 billion, almost 50% more than the 2023 Q1 $836 million CMBS office debt.

The 2024 Q1 payoff rate was 47.4%, relatively great compared to the 2023 rate of 35%.

Unfortunately, the percentage of loans that defaulted at maturity and were not modified or extended is also up. “In Q1 2024, 43.5% of the loans defaulted at maturity, a 9% jump compared to 2023’s overall rate of 34.5%,” analysts wrote. “Consequently, the proportion of loans that were extended has drastically decreased.”

That could mean more problems sooner rather than later.

Also, the 47.4% is heavily weighted by one big case. “The YTD payoff rate is also buoyed by the successful January payoff of the $412.4 million loan known as the Google and Amazon Office Portfolio located in Sunnyvale, CA. Excluding that loan, the YTD payoff rate would be a paltry 21%,” Moody’s wrote.

They said similar things would happen when “another Google-occupied property in Sunnyvale, Technology Corners Building Six, and The Kendall Square portfolio loan, backed by high-tech R&D labs near MIT, were both scheduled to mature.” Both are already paid off, but that status won’t show up until the May payoff date.

March also saw two loans with debt yields of 8% or above and limited lease rollovers. Only one paid at maturity, with a payoff rate of 19%, far lower than the 86.1% for the same type of collection in 2023 Q1. The $14 million loan that didn’t pay off this March was on Brier Creek Corporate Center, a 123,000-square-foot office in Raleigh, North Carolina. It’s fully occupied, but two big leases that are two-thirds of all the rentable space expire at the end of 2027.

Loans below $10 million surprised to the downside. In 2023, the category hit an 88% payoff rate by loan count. Only eight loans of this size failed to pay off last year. In 2024 Q1, there have already been six that didn’t, making 46%.

The largest payoff problem comes from the $50 million to $100 million range, where three out of three failed to pay off.

And this year looks bad for office so far. “The balance of office loans maturing in the next 12 months totals $18 billion, of which 73% (~$13.12 billion) have current performance characteristics that would make them very difficult to refinance, given payoff rate trends we’ve highlighted consistently as “make or break” for many maturing office loans,” Moody’s wrote.