Fitch: Office loan delinquencies will exceed global financial crisis levels

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

Fitch Ratings on Friday raised its U.S. office CMBS 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 the end of year, according to the report. The new peak forecasts are up from the 8.1% for 2024 and 9.9% for 2025 that Fitch predicted earlier this year.

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

Fitch doubled its “deteriorating” outlook for the US office sector through the end of this year, citing higher interest rates, slower economic growth, a tighter credit environment and “a secular decline in demand for office”. These factors make refinancing even more difficult, pushing more loans into delinquency and special services.

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

Office properties remain the most common type of commercial property to experience delinquencies and foreclosures. Trade closings 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 prolonged than after the country’s last major financial crisis. This will lead to permanent depreciations in property values, which have already fallen by around 40%, according to Fitch.

This is a smaller drop than the 47% drop during the GFC. But it is the lowest in four years and the cycle is far from over, 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 rate of any prime property type. Urban offices had a refinancing rate of 5% through May, significantly underperforming Fitch’s expectations.

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

Most office loans maturing in the next two years should remain cash flow positive. Grade B and C office properties are at the greatest risk of performance deterioration as they are typically securitized in multi-borrower channel transactions, the report said.

Single-asset, single-borrower office loans are performing better. However, 18 out of 44 of these loans are distressed by Fitch.