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'The Tipping Point Came': Delinquency Rate On CMBS Loans Shoots Up

EY Plaza at 725 South Figueroa St. in Los Angeles, which is in receivership after a Brookfield fund defaulted on its loan.

As the commercial real estate sector continues to feel pain from rising interest rates, more and more borrowers are having trouble staying current on their loans.

The delinquency rate on CMBS loans in May spiked by the most in three years, according to a report by Trepp. The rate of loans behind on payments rose 53 basis points, the largest increase since June 2020, when the pandemic drove a 3% jump. Overall CMBS delinquency is now 3.65%, the highest level since March 2022.

"CMBS investors and market participants have been waiting for months for delinquencies to spike. Since last summer, higher rates and lagging office demand have led to expectations of substantially higher delinquency levels," Trepp Senior Managing Director Manus Clancy wrote in the report. "It appears that the tipping point came this month."

The increase was mainly due to troubles in the office market. The delinquency rate on office CMBS loans jumped 128 basis points to 4.2% — the first time office delinquencies were above 4% since 2018, according to Trepp.

Office buildings have had a trickier time securing refinancing on loans coming due at maturity, causing them to go into default. Monday Properties missed a payment last month on part of an $841M CMBS loan backed by a 2.1M SF office building portfolio near Washington, D.C., Bisnow reported Thursday. The loan is expected to go into special servicing ahead of a June 9 maturity date because the owner hasn't been able to refinance it. 

"Elevated interest rates and impaired real estate values are causing significant strain on commercial office owners and investors globally," a Monday Properties spokesperson said. "As with many other owners, we are grappling with the challenges lingering from the pandemic and exacerbated by economic headwinds."

Also last month, a Brookfield entity turned over the keys to the second Downtown Los Angeles office building in as many months after falling behind on payments on a CMBS loan.

The number of office loans expecting to run into trouble is expected to continue increasing this year. Banks have become reticent to lend on buildings as the warning signs about commercial real estate values keep flashing.

“In the current environment, we’re seeing many, many offices, sometimes regardless of performance, that are moving to special servicing at maturity because financing to take them out is not there," Morningstar Credit Head of CRE Analytics David Putro told Bisnow this week.