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Fitch: Office Loan Delinquencies Will Surpass Global Financial Crisis Levels

The delinquency rate of U.S. CMBS loans will rise more than expected this year and next, eclipsing the Global Financial Crisis peak in 2025, according to a new national office report.


Fitch Ratings on Friday increased its U.S. CMBS office delinquency forecast to 8.4% for 2024 and 11% for 2025. The office delinquency rate was 4.3% in April, meaning it will nearly double by year's end, according to the report. The new peak predictions are up from the 8.1% for 2024 and 9.9% for 2025 that Fitch projected at the start of this year. 

The office delinquency rate peaked at 8.1% during the GFC.

Fitch doubled down on its “deteriorating” outlook for the U.S. office sector through the end of this year, citing higher interest rates, slower economic growth, a tighter lending environment and “a secular decline in office demand.” These factors make it even harder to refinance, pushing more loans into delinquency and special servicing.

The revised projection comes as the second half of the year approaches, a period when some economists predicted interest rates might start to fall. The Federal Reserve has held rates between 5.25% and 5.5% since last July, though slight inflation cooling is keeping hopes alive for interest rate cuts later this year. 

Office properties remain the most common type of commercial property to experience delinquencies and foreclosures. Commercial foreclosures more than doubled in March compared to the same month in 2023, Bisnow previously reported.

The recovery of the office sector this cycle will be slower and more drawn out than after the nation's last major financial crisis. This will lead to permanent impairments in property values, which have already fallen about 40%, according to Fitch.

This is a lesser decline than the 47% drop during the GFC. But it is the lowest in four years, and this cycle has yet to bottom out, the report says. 

The slow recovery is expected to lead to weaker performance and higher loan losses, according to Fitch.

Office has the lowest refinance percentage of any major property type. Urban offices had a refinance rate of 5% through May, significantly underperforming Fitch’s expectations. 

Fitch expects a 16% to 21% refinance rate for loans maturing through the end of 2024. 

The majority of office loans maturing in the next two years should remain cash flow-positive. Class-B and C office properties are at the greatest risk of performance deterioration, as they have typically securitized in multiborrower conduit transactions, the report says. 

Single-asset, single-borrower office loans are performing better. Even so, 18 out of 44 of these loans are Fitch loans of concern.