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A big driver is the “secular decline in the office market” that even slashed interest rates would not end.
By Wolf Richter for WOLF STREET.
There has been a recent flurry of declarations by big fund managers with exposure to the office sector of commercial real estate that office CRE has “bottomed out,” or is “near bottom,” or that “we can at least now see the bottom,” or that “while we might not be at the bottom just yet, we’re close to it,” etc.
But Fitch Ratings has come out with an updated analysis of the US office market, and it doesn’t see the bottom just yet. Far from it.
“CRE office loan performance will continue to weaken as market pressures build,” it said about office loans backing the Commercial Mortgage-Backed Securities (CMBS) it rates.
It maintains its “’deteriorating’ outlook” on the office sector through 2024, citing:
“Sustained higher interest rates” (buying into the Fed’s higher-for-longer)
“Slower U.S. economic growth”
“A tighter lending environment” (banks, up to the gills in iffy CRE debt, have severely restricted CRE lending, and so refinancing maturing CRE loans can be difficult to impossible).
“And a secular decline in office demand” (as documented by the astronomical mindboggling amounts of office space that’s on the market for lease).
This “secular decline in the office market” has turned into a flood of office space that is vacant and on the market for lease, as companies have discovered that they don’t need this vast amount of office space, with availability rates in many big office markets at around 30%, topped off by 36% in San Francisco, which was a few years ago the hottest office market in the US (availability rates by Savills):
“These factors will exacerbate refinancing challenges, leading to rising loan delinquencies and transfers to special servicing for potential workout or modification,” Fitch said.
It raised its office delinquency forecast to 8.4% by the end of 2024, which would surpass Fitch’s peak Financial Crisis delinquency rate of 8.1%.
And then in 2025, it sees office CMBS delinquencies to deteriorate further and hit 11%.
Office values have dropped approximately 40% so far, Fitch said, compared to 47% during the GFC. But office values “have yet to bottom out,” it said.
Office CMBS delinquency rates.
In May, there were an additional $1.2 billion in CMBS office loans that had become delinquent, according to Trepp, which tracks and analyses CMBS.
But a little over $2 billion in delinquent office loans resolved “either because the loans flipped back to non-delinquent during the month, or because the loan was disposed,” Trepp said. Five of those loans accounted for $1.7 billion. And so they flowed out of the delinquency bucket.
“If the $2 billion in office resolutions had remained delinquent, the May office delinquency rate would have been roughly 90 basis points higher at 8.48%,” Trepp said.
With those $2 billion in office loans having come out of the delinquency bucket, the Office CMBS delinquency rate dipped to 6.94%.
The downticks in the chart were months during which larger balances of office loans were resolved than newly delinquent office loans flowed into the delinquency bucket. When those office loans are resolved and come out of the delinquency bucket, it often comes with a big loss to the CMBS holders, in some cases over 80%, when even the top-rated tranches take a loss, and sometimes at a 100% loss for all CMBS holders, such as the 46-story 1.4-million-sf tower in downtown St. Louis that was sold in a foreclosure sale for about $4 million, which barely covered the fees.
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The post Fitch Doesn’t See Bottom of Office CRE Mess, Sees CMBS Delinquency Rates Spike Way Past Financial Crisis Peak in 2025 appeared first on Energy News Beat.
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