Office Market Faces Rising Delinquencies, Maturing Loans

The beleaguered office market, already dealing with flat utilization, falling values and elevated interest rates, now faces rising defaults and delinquencies as hundreds of billions in office loans are set to mature over the next few years.

More than $260 billion of office loans – representing 30% of the total amount– have either recently matured or are maturing by the end of 2026, according to CommercialEdge’s July 2024 office market report. Atlanta has the highest concentration of maturing loans with 43.8% of its office loan volume having recently matured or due to mature by the end of 2025. Denver, Nashville, Chicago and Minneapolis-St. Paul round out the top five markets with high concentrations of maturing loans.

These maturing loans are adding to a precarious situation for the office sector, which recorded $187 billion of new office delinquencies in June, pushing the sector’s delinquency rate to 7.5%, according to Trepp. Discount purchases have been increasing, and CommercialEdge said it expects all-cash sales to rise as lenders aim to decrease their exposure to the sector.

The national average full-service equivalent listing rate was $31.67 per square foot in June, according to the report, and the national office vacancy rate was 18.1%, an increase of 100 basis points year-over-year. The report said U.S. office vacancy rates have been rising in most of the top 25 markets, with the most significant growth being registered in San Francisco, Dallas, Los Angeles, Seattle and Austin.

The construction pipeline for office spaces has shrunk substantially this year, with new starts well below replenishment level, according to CommercialEdge. Nationally, 76.9 million square feet of office space was under construction as of June, representing 1.1% of stock. Through June, 23.5 million square feet of office stock had been delivered, while only 6.9 million square feet broke ground.

CommercialEdge said demand for office space is unlikely to ever fully return to pre-pandemic levels, and banks have become unwilling to provide loans for new office construction while developers have all but abandoned the office sector in 2024.

The life science sector, which experienced a development frenzy over the past 3 years, has returned to a more typical development pace, the report said. In 2021, life sciences constituted roughly 20% of all office starts, while in 2022 and 2023, it accounted for over a quarter of all office space that broke ground. In 2024, however, the sector returned to a level within its historical averages, accounting for just 9% of the square footage started this year, said the report.