CRE Mortgage Delinquencies Climb as Office Struggles Persist

Delinquencies for commercial real estate mortgages climbed in the third quarter of 2024, but not all sectors felt the same pain. Loans backed by office and multifamily properties saw upticks in late payments, while delinquency rates for retail, industrial, and hotel properties fell, according to the Mortgage Bankers Association’s latest Loan Performance Survey.

Overall, 96.8% of outstanding loan balances were current or less than 30 days late at the end of Q3, down slightly from 97% in the previous quarter. The percentage of commercial mortgages classified as delinquent for more than 90 days or in Real Estate Owned (REO) status increased by 20 basis points to 2.7%.

“Some property owners are facing increasing challenges with their mortgage payments,” said Jamie Woodwell, MBA’s head of commercial real estate research. “Loan performance is being impacted by a variety of factors, some positive and some negative, depending on the property type and market.”

Office properties continue to feel the strain, with delinquencies on loans tied to these assets rising 70 basis points to 7.8% by the end of September. The office sector’s troubles have been exacerbated by remote work trends, causing a glut of unused space post-pandemic, forcing many owners to renegotiate leases or face mounting financial pressures.

Multifamily loans also saw a slight uptick in delinquencies, rising from 1.1% in Q2 to 1.2% in Q3, reflecting ongoing challenges in the rental market despite strong demand in some regions.

On the flip side, lodging, retail, and industrial properties appear to be faring better. Delinquency rates for retail loans fell 70 basis points to 3.8%, and industrial properties recorded just 0.6% of loan balances in delinquency at the end of the quarter. The hospitality sector also saw improvement as travel demand continued to recover, with hotel loan delinquencies dropping by 30 basis points to 5.7%.

The growing divide between office and other sectors underscores the uneven recovery in commercial real estate. As office landlords struggle with shrinking demand, retail and industrial spaces are seeing stronger performance, driven by shifting consumer habits and e-commerce growth.

While rising delinquencies could be an early sign of economic stress, particularly in the office sector, the overall market remains relatively stable for now. Still, lenders may adopt more cautious strategies, tightening underwriting standards and potentially raising interest rates on new loans as the landscape evolves.

For investors, the mixed performance across property types highlights the need for careful risk management, especially when it comes to office space.