Key Takeaways
Office properties remain the biggest pain point in commercial real estate loans. Loan burdens are growing and delinquencies are on the rise. Delinquencies are growing amid continued extensions and modifications by lenders. As a result, the amount of commercial real estate loans maturing at the end of 2024 has jumped 41% to more than $900 billion.
Commercial office real estate and related lending problems continue to plague the U.S. banking industry, and the nightmare is likely to continue for some time to come.
Concerns over their exposure to commercial real estate loans have rattled the shares of many regional banks over the past year in the aftermath of a wave of bank failures last year, as rising interest rates have made it harder for borrowers to refinance, a problem further complicated by falling property values.
About 6.63% of all commercial mortgages were delinquent in February, up 33 basis points (bps) from January, according to research firm Trepp.
The increase reflects the average monthly increase over the past 12 months, with Trepp's report showing that a year ago, just 2.38% of all office mortgages were delinquent.
The growing loan stress reflects the U.S. office market, which has faced eight consecutive quarters of declining demand. Office vacancy rates hit a record high of 19.7% in early 2024.
“Commercial real estate is a slow burn, a classic burn,” Bank of America Chief Executive Brian Moynihan said in an interview on Bloomberg TV this week.
Office Loan: “Living on Borrowed Time”
But fueling the fire has mainly been office properties that have yet to recover from the pandemic, or may never recover.
“Office mortgages are coming due soon,” Goldman Sachs analysts said in a report this week.
Goldman noted that as lending stress mounts, extensions and modifications of existing debt will result in $929 billion in commercial real estate loans coming due through the end of 2024, up 41% from a year ago.
Goldman expects the modification trend to continue, at least for now, even as banks increase reserves for losses on commercial real estate loans, but banks may not be able to withstand the wave for long.
“Continued downward pressure on office property prices and net operating income growth could push borrowers into strategic defaults, while the ability of balance sheet constrained lenders to continue to modify and extend loans may diminish over time,” Goldman said.
Office loan woes may not spread
According to Trepp's monthly report, delinquency rates across the commercial real estate market increased to 4.71% from 3.12% a year ago, almost entirely due to the struggling office market.
Retail delinquency rates fell to 6.03% from 6.75% a year ago, while multifamily and manufactured housing delinquency rates remained roughly flat from a year ago at 2% and less than 1%, respectively.
Goldman played down the possibility that sluggish office sales and falling property values could spread to other parts of the commercial real estate market.
The investment bank also noted that banks' capital positions are stronger than before the 2008-09 global financial crisis and the savings and loan crisis of the 1980s.