Office CMBS Delinquency Rate Spikes to Record 11.7%

Summary

Extend-and-pretend and forbearance deals widely implemented to “cure” delinquent CRE mortgages. The office and multifamily sectors of commercial real estate loans got further bludgeoned in August, despite large-scale extend-and-pretend and forbearance deals executed in the hopes for better times and lower interest rates and more demand so that lenders don’t end up with the property and a huge loss. The delinquency rate of office mortgages that have been securitized into commercial mortgage-backed securities (CMBS) spiked to 11.7% in August, the worst ever, a full percentage point above even the peak meltdown rate of the Financial Crisis (10.7%), according to data by Trepp , which tracks and analyzes CMBS. Back in December 2022, the office CMBS delinquency rate was still 1.6%. Since then, it has exploded by over 10 percentage points. It’s the older office towers that get in trouble. High vacancy rates in new fancy office towers allow companies to move from an old tower to a new tower, thereby upgrading and downsizing at the same time. This “flight to quality” is increasing the pressure on older towers. The delinquency rate for multifamily CMBS, backed by rental apartment property mortgages, jumped to 6.9%, the worst since December 2015, just before the defaulted $3-billion loan on Stuyvesant Town–Peter Cooper Village in Manhattan was “cured” through the sale of the property to Blackstone, which caused the CMBS delinquency rate to plunge. Two years ago, the multifamily CMBS delinquency rate was still 1.8%. Multifamily has now become the second worst category of CRE, after office CMBS, and ahead of lodging CMBS (delinquency rate of 6.5%) and the long-beaten-down retail CMBS (delinquency rate of 6.4%). The delinquency rate for industrial properties, such as warehouses and fulfillment centers for ecommerce, has risen but remains very low (0.6%). The CMBS were sold to institutional investors, such as bond funds, insurers, etc. Banks that originated the loans are off the h...