Office-backed commercial loans finished 2023 with a delinquency rate of 6.5%, up from 5.1% in the third quarter, according to the Mortgage Bankers Association.

Across all commercial property types, 3.2% of loans were delinquent in Q4 of 2023, the MBA said, up from 2.7% in the quarter before. Office-backed loans had the highest delinquency rate, followed by hospitality with 6.1%.

Multifamily delinquencies also edged up quarter-over-quarter, from 0.9% to 1.2%, as did industrial delinquencies, from 0.6% to 0.9%. Only retail delinquencies didn't budge over Q4 2023, staying flat at 5%.

The MBA expects conditions to improve somewhat in 2024 in anticipation of an improved interest rate environment.

“Long-term interest rates have come down from their highs of last year, which should provide some relief to some loans, but many properties and loans still face higher rates, uncertainty about property values and – for some properties – changes in fundamentals,” MBA Head of Commercial Real Estate Research Jamie Woodwell said in a statement.

Apart from the challenging increase in interest rates in 2022 and 2023, some new market realities are setting in as office usage remains well below pre-pandemic levels despite some major companies' return-to-office efforts.

Overall office vacancies reached a record high of 19.6% at the end of 2023, according to Moody's Analytics data released earlier this month. That is up from 18.8% at the end of 2022 and more than the previous record of 19.3% reached in both 1986 and 1991.

Vacancies stand to increase even more as large leases expire and the appetite to renew has been replaced with the urge to downsize office footprints among many corporate users. About 217M SF of U.S. office space has leases with expiration dates in 2024 or 2025, CRED iQ reports.