Office Market Avoids 'Sinking Lower' As CMBS Loans Signal Stabilization

Nearly six years after the pandemic upended the office market and caused a wave of financial distress in the sector, analysts say its debt markets are starting to show signs of stability.

New reports from KBRA and Trepp on refinancings and special servicing rates for CMBS loans show office distress retreating as more borrowers are able to pay off their loans.

The rate of office loans being paid off rose to 70.1% by loan count and 58.3% by balance in 2025, KBRA's report found. That was up 11.3% and 28.7%, respectively, from the prior year. 

“For office, it was important for people to see they had improved meaningfully,” KBRA Managing Director Robert Grenda said.

“The fact that the payoff rate improved is maybe a broader reflection of the office market reaching the bottom and stabilizing,” he added.

The percentage of office CMBS loans in special servicing fell to 16.64% at the end of last year, Trepp's report found. That was down 66 basis points from October but still 186 basis points above the 12-month average.

Office and mixed-use loans, which often have an office component, remained at the bottom of the pack in both reports even as their improvement outpaced other sectors.

A separate Trepp report found that the office delinquency rate fell to 11.3% last month from 11.8% in October. Still, it was ahead of the previous three Decembers by 30, 549 and 973 basis points, respectively.

“We’re at an all-time high for both of those rates. They’ve kind of leveled off,” Trepp Senior Manager Thomas Taylor said of special servicing and delinquency rates in the office market.

“I’d be surprised if they spiked … I wouldn’t get ahead of ourselves and say they are coming down,” he added.

The newfound stability chronicled in these reports wasn’t spread evenly across the office sector.

A bifurcation that has been widening for years continues to leave trophy properties in a strong position as less desirable spaces struggle.

“There’s kind of the have and have nots,” KBRA Associate Director Gina McKeever said. “You have office properties that are high-quality, good location, those are probably getting refinances … It’s really the lower-quality assets that continue to struggle.”

More stable Class-A office loans tend to have higher balances, with some even exceeding $1B, which means they have an outsized impact on delinquency and special servicing rates, Taylor said. Much of the office distress is concentrated among smaller loans that have less of an impact on sectorwide numbers.

The three largest office loans that paid off last year were all in highly desirable Manhattan, KBRA reported. That includes the $1.4B loan at 200 Park Ave., the $1.1B borrowed at 3 Bryant Park and the $463M for nearby 5 Bryant Park.

The office market is outperforming some of the more pessimistic predictions issued in the first half of 2025. 

That is in part due to office usage increasing as more companies institute in-office mandates, and experts also attribute it to a surprisingly sturdy economy, as the Trump administration’s tariff policies have been less destructive than many initially projected.

The U.S. posted GDP growth in Q2 and Q3, while the unemployment rate grew just 40 basis points to 4.4% over the course of the year and fell by 10 basis points in December.

“The economy was on a little bit sounder footing than most were expecting,” Grenda said.

“That kept fundamentals in a lot of property types stable … It certainly helped prevent the office market from sinking lower.”

Now, he said lenders are more willing to seize some office properties from struggling owners since there is a clearer light at the end of the tunnel — with more opportunistic investors looking to deploy capital into the sector. 

“There might actually be an exit strategy that involves liquidation and getting reasonable proceeds,” Grenda said.

Still, Taylor characterized the overall special servicing rate’s 15-basis-point dip in December as a monthly nuance. It came as $1.9B transferred to special servicing across 49 loans, which he said is the lowest that metric has been since September 2024.

There may be more office distress bubbling under the surface.

“I’m going to be watching this month very closely,” Taylor said.

“I’m curious to start the new year if there’s going to be any loans that they need to work out. That rate can really move when you get to the larger loans.”