US Office Buildings Face 12% CMBS Delinquency as Treasury Yields Near 5%

US commercial real estate office buildings are facing expanded distress as high interest rates and rising borrowing costs take full effect, according to industry data released November 8. Office loan delinquency rates in commercial mortgage-backed securities have held near 12% for approximately 10 months—five times the 2021 peak of 2.5%—while defaults totaled $6.8 billion through September, trending toward last year's $10.5 billion, per real estate data firm Trepp. MSCI estimates over 20% of office loans maturing in the second half of this year are underwater, with loan balances exceeding collateral property values. The distress stems from surging US Treasury yields, which climbed approximately 67 basis points since the start of the year to near 5%, directly raising refinancing costs for borrowers who originated loans during the 2021 historic low-rate period. Trepp Chief Product Officer Lonnie Hendry stated that 'all conditions for a perfect storm are in place,' with borrowers now forced to inject additional equity to refinance or realize losses through discounted asset sales.

Office CMBS Delinquency Rates Hold Near 12% for 10 Months

Delinquency rates for office loans backing commercial mortgage-backed securities have remained near 12% over the past approximately 10 months, according to Trepp data cited by Business Insider. This represents roughly five times the 2021 peak delinquency rate of 2.5%. New office loan defaults through September totaled $6.8 billion, and the current trend suggests the full-year figure will approach last year's $10.5 billion. Trepp CPO Lonnie Hendry remarked that 'this is no longer just a headline concern—the numbers simply don't add up,' adding that borrowers attempting to refinance will need to inject additional equity.

MSCI Estimates 20% of H2-Maturing Office Loans Underwater

MSCI estimates that over 20% of office loans maturing in the second half of this year have loan balances exceeding the value of their collateral properties—a condition known as being 'underwater.' The firm also projects that total US commercial real estate loans maturing in the second half exceed $310 billion, with approximately half originated in 2021 when interest rates were at historic lows during the pandemic. Commercial real estate loan rates are often tied to US Treasury yields, and the 10-year Treasury yield remains near 5% despite recent risk-off declines, having risen approximately 67 basis points since the start of the year.

Polsinelli Co-Head Projects Additional 10% Decline for B-Grade Offices

Rob Kunin, co-head of real estate at Polsinelli in New York, stated that the full impact of high interest rates on office valuations could take up to 12 months to materialize. He analyzed that some B-grade office buildings could realistically see an additional 10% price decline. Kunin warned that 'this will be a significant blow to already vulnerable borrowers,' adding that those already struggling 'could ultimately be pushed beyond the breaking point.' Trepp CPO Hendry projected that the most severely distressed buildings could experience value declines of up to 40%.

Cushman & Wakefield Reports 45% of Post-2022 Office Loans Are Floating Rate

Borrowers using floating-rate loans are experiencing the impact of rate increases immediately, according to Cushman & Wakefield data showing that approximately 45% of office loans originated since 2022 carry floating rates. Borrowers with fixed-rate loans must refinance at significantly higher rates when maturities arrive. Lenders may demand even higher rates for buildings with elevated vacancy rates to reflect default risk, further increasing borrower burden. Trepp data indicates that office CMBS loans with final maturities in 2027 total approximately $22 billion. Hendry stated that market stabilization requires distressed office prices to adjust sufficiently and transaction activity to resume, concluding that 'losses must ultimately occur, and someone must absorb those losses.'

FAQ

What is the current delinquency rate for US office CMBS loans?
The delinquency rate for office loans backing commercial mortgage-backed securities has held near 12% for approximately 10 months, according to Trepp data released November 8. This is roughly five times the 2.5% peak recorded in 2021.

How much did US office loan defaults total through September?
New office loan defaults totaled $6.8 billion through September, per Trepp. The current trend suggests the full-year figure will approach last year's $10.5 billion in defaults.

What percentage of H2-maturing office loans are underwater according to MSCI?
MSCI estimates that over 20% of office loans maturing in the second half of this year are underwater, meaning loan balances exceed the value of the collateral properties.