Office property values face further losses ahead and a recovery even longer than after the Global Financial Crisis, according to Fitch Ratings.

The slide in office values will “lead to permanent property valuation impairments and higher CMBS loan losses relative to expectations at issuance,” the company said in a note.

So far this cycle, office values have declined about 35%, Fitch notes, citing Green Street Advisors U.S. Commercial Property Price Index. Current trends suggest office property values haven't yet reached their post-2020 trough. Further declines ahead are expected to surpass the post-GCF bottom, which was a value drop of 47% from the peak.

The recovery of office values after the crash in 2008 took 87 months, according to the CPPI, or more than seven years. The post-2020 drop has already lasted four years.

After the GFC, low interest rates and slowly recovering demand helped office properties recover, but that will not be the case this time around, Fitch said, nor will there be a surge in demand, despite the relatively strong economy otherwise.

Fitch also projects that the CMBS office delinquency rate, which is currently 3.6%, will balloon to 8.1% later this year and 9.9% in 2025, higher than the post-GFC peak.

As office-associated CMBS loans default, their resolution periods have increased and are now at about four years, compared to about 2.5 years between 2009 and 2019, “indicating property liquidations and the realization of losses for office loans currently in default could play out through 2028 and beyond,” Fitch said.

The median implied capitalization rate for the office sector rose to 11.6% in the fourth quarter of 2023, the highest level in the analysis going back to 2000, according to S&P Global Market Intelligence.

The figure marked a 91 basis-point increase over the 10.7% median rate for Q3 2023, and a 2.1 percentage point jump year-over-year.