Denver Office Distress Lands It In Nation's Delinquency Top 10

Denver now ranks sixth among the 25 largest U.S. metro areas for office CMBS delinquencies, according to new data from Trepp.

The city’s CMBS office delinquency rate sits at 27.2%, nearly three times the national average of 10.6%. That puts Denver ahead of markets like Baltimore (26.6%) and just behind Atlanta, Chicago and Philadelphia, all sitting above 28%.

The only western U.S. market ranked higher is Portland, Oregon, which leads the entire pack at 38.4%. 

At the other end of the spectrum, San Diego’s rate is less than 1%, while most highly populated East Coast cities — including New York, Boston and Washington, D.C. — are clustered around or just below 10%.

“Borrowers took on debt loads that were kind of inflated by the cheap cost of capital,” said Tom Taylor, senior manager of research at Trepp, referring to the prepandemic building boom fueled by low interest rates and massive migration.

“The story in Denver is similar but not exactly the same as what’s going on in Seattle, Austin and Nashville.”

Seattle, Austin and Nashville, however, all have significantly lower distress rates of 13.3%, 8.3% and 2.8%, respectively.

Denver’s office delinquency problem traces back to a wave of loans originated at historically low interest rates between 2018 and 2021. As values reset and tenants retrenched, owners struggled to refinance or reposition. 

“Before Covid, the urban rate was near zero,” Taylor said.

Several large downtown assets illustrate the distress trend:

• Industry RiNo Station is more than 90 days delinquent on a $60M loan, with just 54% occupancy. A receiver was appointed in April.
• 700 Broadway, a Capitol Hill medical office property, is 30 days delinquent on its $51M loan. It is in special servicing for imminent monetary default.
• World Trade Center I and II are already in real estate owned status after foreclosure. The property, once valued at about $176M, was appraised last year at just $34.1M, a 75% haircut.

Together, these three buildings represent nearly $337M of Denver's delinquent office loan balance, which Trepp pegs at $434M.

Taylor said the cracks began forming well before interest rates jumped. 

“A lot of the value dislocation had already gotten started when rates started rising and firms started vacating or not renewing leases,” he said.

The distress is most acute in older, noncore assets and buildings with near-term lease rollover. 

“Generally speaking, what we’ve found is that Class-A office is thriving in growing cities,” Taylor said. “There’s a consensus forming around three to four days in the office. But smaller firms are downsizing or moving out of Class-B and C space.”

Meanwhile, the clock is ticking. The average duration of CMBS office loans has shortened in recent years, and many five-year loans originated in 2021 will hit maturity next year, setting the stage for another potential wave of distress. 

CORRECTION, JULY 1, 11:40 A.M. ET: This story has been updated to accurately reflect the migration between asset classes.