DBRS Morningstar reports a growing number of delinquent loans tied to office properties in the United States. The credit rating service projects the payoff rate on maturing commercial mortgage-backed securities (CMBS) will hover in the 50-to-55 per cent range for the remainder of 2023 with a large portion of subsequent refinancing, special servicing agreements or liquidations related to office, retail and hotel assets.
The latter property types generally carry a higher loan-to-value (LTV) ratio than industrial or multifamily properties, and also account for more than 80 per cent of maturing loans. DBRS Morningstar’s recently released CMBS status report counts July as the fourth consecutive month with rising delinquency rates, pegged at 3.85 per cent of all property types and at 4.6 per cent of office loans.
The July office delinquency rate is a 308 basis point (bps) increase over year-end 2022, including nudging up 48 bps since June. As well, the delinquency rate for properties classified as “other” than the main asset categories — which typically include mixed-use projects with an office component — rose 60 bps over the June level. The percentage of office loans referred to special servicing has also climbed over eight consecutive months, standing at 8.14 per cent in July, up from 4 per cent at year-end 2022 and 3.27 per cent 12 months ago.
Nevertheless, liquidations remain rare with 10 CMBS loans totaling USD $214.4 million garnering slightly more than USD $53 million through distressed property sales in July — a loss rate surpassing 75 per cent. “Many special servicers are opting to hold on to the debt for longer and work out situations with borrowers,” the DBRS Morningstar analysis notes.
Rising interest rates and lenders’ wariness continue to complicate refinancing as only 11.2 per of maturing office-backed loans were paid off in July. The overall payoff rate of maturing loans slumped to just below 29 per cent, down from 45.4 per cent in June. Notably, though, 95 per cent of maturing loans on multifamily properties were paid off.
“Commercial real estate, especially office space, has been under intense investor scrutiny. Office performance has been declining as employees show a continued preference to work from home,” the accompanying analysis states. “With both daily and leased vacancy rates at multi-decade highs, we expect the office market to continue to struggle.”