Office Bears the Brunt of CRE Distress at 2024 Halftime
39% of the CMBS loans mature in the Q1 became delinquent and failed to pay off or get extended.
Trepp’s mid-year look at CRE described the office sector as “on the brink” and “navigating the pain of an uncertain future.”
“The commercial real estate (CRE) market continues to grapple with persistent risk and distress, with the office sector bearing the brunt of the impact,” they wrote. “As the markets are feeling the full effect of the interest rates that are much higher than they had been as recently as two years ago, many properties securing maturing loans aren’t performing to the levels that had been expected.”
The full report looked at two specific developments in office. One is maturity risk and the other is the additional issue of lease rollover risk for maturing loans. Something to keep in mind is that the analyses are based on CMBS loans, which represent one part of office financing and may not be representative of the whole.
A combination of 2,814 CMBS loans against office or mixed-use properties are scheduled to come due by the end of 2025. They represent $75.68 billion in financing and are coming due at a time when higher interest rates, concerns about bank CRE loans, and much stricter underwriting make the chance of refinancing these loans less likely. Lenders are worried about the category in general and are unwilling to consider highly leveraged properties.
The loans have an average 5.515% coupon and median 4.83% coupon. There are many floating-rate mortgages in the mix, pegged to SOFR, which rose from 0.05% in March 2022 to the current 5.3%.
“There’s no doubt that there is heightened risk of maturity defaults in the office sector, particularly among loans against second-tier buildings,” they wrote. “But a silver lining is that most of the largest loans that come due by the end of next year could very likely pass any refinance test easily. That’s to be expected as such super-large loans typically are secured by trophy properties that are in favor among tenants.”
But that brings up the second risk of lease rollover. One of the innate requirements of working through financial difficulties is maintaining revenue. Out of 48 loans worth $1.3 billion, dominated by office loans, “face the maturity of leases governing at least 50 percent of their spaces by the end of next year.” San Francisco, Chicago, and Washington, D.C. are three metros that face significant challenges when some big office properties will see a large exodus of lease base.