Bad Office Debt Drives February Jump In CMBS Delinquency

Office buildings, skyrise, skyscraper, towers, office market, offices

The debt securities market is darkening, and the grim fate of the office sector is the biggest reason why.

The percentage of commercial mortgage-backed securities delinquent on debt payments jumped by 18 basis points to 3.12% in February, the second-largest monthly increase since June 2020, Trepp found in its monthly CMBS delinquency report.

The delinquency rate for office-backed CMBS loans rose 55 basis points, easily the biggest increase among property sectors.

Overall, the CMBS delinquency rate sat lower in February than it had been 12 months ago by 75 basis points, but surpassed the rate from six months ago, per Trepp. Industrial delinquency remained unchanged at 0.4%, by far the lowest rate for any commercial sector, while retail-backed CMBS delinquency increased 17 basis points to 6.75%, remaining the sector with the highest delinquency rate.

While retail's struggles pre- and post-pandemic have been well-documented, the struggles of the office debt market could be just beginning, especially when it comes to securitized debt, Strategic Value Partners founder Victor Khosla said during a Bloomberg video segment.

"When you look at a whole bunch of debt coming due, and you have underlying economic characteristics like you can't rent your space out, you're about ready to start a cascade of restructurings in [U.S.] office space," Khosla said.

With the Federal Reserve signaling renewed aggression in its approach to interest rates, the debt market has very little patience for the office sector's poor fundamentals. Even amid a flight to quality, major headquarters projects are being put on hold across the U.S., a symptom of the cratering in leasing demand.

A disproportionate share of CMBS debt is backed by office properties, especially in New York. Even high-profile Manhattan buildings have found few alternatives when saddled with maturing debt.

"Everybody hides until the day they can't, and those debt maturities are upon us," Khosla said. "There are a couple of very noteworthy, name-brand deals in the U.S., which are just in the process of starting those restructuring discussions, and we think it's just the start."

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