Upswing in office delinquencies add to commercial real estate distress

Office mortgage delinquency rates are now higher than those of retail properties

Upswing in office delinquencies add to commercial real estate distress

Mortgage delinquency rates for commercial and multifamily properties rose for the fourth consecutive quarter, with office delinquencies driving the increase in the third quarter.

The early delinquency rate inched up four basis points to 97.3% at the end of the third quarter, according to the Mortgage Bankers Association’s recent Commercial Real Estate Finance (CREF) Loan Performance Survey. Loans that were 90+ days delinquent, or in REO, rose to 2.2%, up from 1.7% in the previous quarter.

Jamie Woodwell, MBA’s head of commercial real estate research, pointed to a notable shift in the market, highlighting that: “The delinquency rate for loans backed by office properties now exceeds those of loans backed by retail and hotel properties.”

Office property loans saw another uptick in Q3, with 5.1% being delinquent, up from 4% in the last quarter. Retail loan delinquency was 5%, a slight increase from 4.9%, while lodging loans decreased to 4.9% from 5.3%.

According to Woodwell, a silver lining is that delinquency rates for multifamily and industrial property loans are still under the 1% mark. Multifamily balances had a 0.9% delinquency rate, up from 0.7%. Industrial property loans saw a decrease in delinquency to 0.6% from 0.8%.

Woodwell further elaborated on the challenges the commercial property markets are grappling with. “Commercial property markets are working through challenges stemming from uncertainty about some properties’ fundamentals, a lack of transparency into where current property values are, and higher and volatile interest rates,” he said in MBA’s report. This combination of factors has led to a “slow and steady uptick in delinquency rates, concentrated among loans facing more of those challenges.”

When it comes to capital sources, CMBS loan delinquency rates stood out with the highest levels at 4.4%, up from 4.1% in the last quarter. In contrast, non-current rates for other capital sources remained relatively moderate:

  • FHA multifamily and healthcare loan balances with 30 days or more delinquency remained stable at 0.8%.
  • Life company loan balances saw a rise in delinquency to 0.7% from 0.4%.
  • GSE loan balances also witnessed an increase in delinquency, moving to 0.4% from 0.3%.

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