The near-term visions of office properties are worrisome – but it’s not the end of the world. The simple story has been an upcoming wave of maturities, with too much working from home, too many companies looking to cut back on space, expensive refinancing, and ultimately hopelessness. It’s not a disaster everywhere — just in too many places at the same time.
A recent Moody’s report pointed to $18.6 billion in CMBS office-backed loans with near-term maturity dates. About 40% are securitized in a single-asset/single-borrower (SASB) large loan deal, with many examples seeing a rise in delinquencies since 2023. But despite the worry, many have credit strengths that should pull them through.
SASB properties aren’t all safe, as GlobeSt.com has previously reported. In May came the news that investors in the AAA tranche of the $308 million debt backed by 1740 Broadway in midtown Manhattan only got 74% of their investment back after the loan sold at a steep discount. That was the safe tranche. Creditors in the five lower groups were wiped out. Then in July, the SASB-backed bond market — an estimated $260 billion worth — was feeling tremors.
In the past, long-term, fixed-rate securitizations dominated the CMBS market. By 2021-2022, the major vehicle was short-term, floating-rate SASB securitizations enabled by low interest rates. Rating agencies that handed out AAA ratings never considered the possibility that property prices would fall below the loan price, making them vulnerable to rapid and sizeable rate changes. And then came inflation and upward moves of interest rates.
According to Moody’s, the SASB office loan delinquency rate was at 8.5% in June. Conduit loans were just over 6%. But 2024 has not seen an unusually large amount of disruption. The payoff rate is 56.4%. The unpaid balance secured extensions, “which usually means the servicer determined underlying collateral is likely to improve with time or the borrower was willing to put additional capital into the property as reserves or to pay down the loan.”
Of the $18.6 billion CMBS office loans that will mature over the next 12 months, 38% — $7.2 billion — are SASB properties. Refinancing will likely be challenging, even if the Federal Reserve begins cutting interest rates. However, almost half of the properties have a greater than 8% debt yield with stable occupancy rates. There’s limited near-term lease rollover.
The conditions put SASB office properties in a better position than properties in recent times and higher than the currently existing 18% of conduit office loans coming to maturity over the next 12 months.