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More than five years after the pandemic shook the commercial real estate world, a huge amount of office-backed debt remains troubled. Many office buildings—particularly older or underused ones—haven’t recovered, leaving billions of dollars in distressed or delinquent loans still unresolved.

According to Trepp, commercial mortgage delinquency rates rose across all lending sources in the first quarter of 2025. The highest delinquency was in commercial mortgage-backed securities (CMBS), hitting 6.42%, up from the previous quarter. By June, CMBS delinquencies climbed further to 7.13%. Unsurprisingly, the office sector is the most distressed, with delinquency reaching a record 11.08%, surpassing its previous high from late 2024.

Some troubled office towers have changed hands recently—usually at steep discounts—but plenty of properties remain in limbo. Many lenders have opted to extend loan maturities temporarily, waiting to see how the market evolves.

Trepp’s chief product officer, Lonnie Hendry, said in a June webinar that we’re still in the early stages of the distress cycle. He noted that many Class B buildings face long-term functional challenges and predicted it will take time before the full scope of distress becomes clear. In comparison, it took several years for delinquency rates to peak after the Great Recession.

Strategies that worked in past downturns—like loan modifications or waiving financial covenants—aren’t proving as effective now because of how drastically the office sector has changed since 2020.

Steven Ginsberg of Ginsberg Jacobs said some of the usual lender tools no longer move the needle: “Those strategies that used to exist just don’t work anymore.”

On the lending side, strong bank balance sheets have helped banks remain flexible, but lenders are increasingly facing tough decisions. It’s been years since the pandemic triggered widespread shifts in how companies use office space, and lenders are now weighing their options: foreclosures, short sales, or other more creative solutions.

However, foreclosures, particularly in cities like New York and Chicago, can drag on for years. That’s why some lenders are carefully mapping out their next steps, according to Paul Grusecki of Hiffman. He said lenders are trying to maintain control over the process and make calculated moves rather than rushing into repossessing buildings.

Some lenders continue to “extend and pretend,” giving borrowers more time while adding clauses that give lenders leverage later—such as appraisal requirements at the borrower’s expense. But signs of lender impatience are growing. Commercial foreclosures rose 27% between the end of 2023 and 2024, with 725 recorded in December 2024, one of the highest monthly totals in a decade.

Owners, too, are making tough choices. Rising maintenance costs and low tenant demand for outdated offices are pushing some borrowers to give up. Grusecki shared a recent example where a broken rooftop air-conditioning unit pushed a borrower to walk away from the property.

Some property owners who have already invested significant equity are deciding whether it’s worth putting in more money—or if it’s better to cut their losses. This has contributed to an increase in office property sales over the past year, often at deeply discounted prices.

Meanwhile, lenders are using a variety of tactics to deal with distressed loans. Some are negotiating deeds-in-lieu of foreclosure, where the borrower hands over the property without going through lengthy court proceedings. Others are selling the loan itself (note sales), although that’s less common due to the complexities involved.

Market watchers agree that at this stage, factors like interest rates are less important than fundamentals like occupancy, operating expenses, and tenant demand. As John Heiberger of Hiffman National noted, small shifts in interest rates won’t save a building that lacks tenants or faces skyrocketing operating costs.

Despite the challenges, most lenders and borrowers have remained cooperative, recognizing that pandemic-driven market disruption—not bad business practices—is the root cause of the distress. And with many longstanding relationships in the real estate industry, parties are working to reach agreements that let everyone move on and avoid protracted legal battles.

As Ginsberg put it: “A lot of lenders and borrowers are going to deal with each other again. They understand each other, they talk about where things are going to end up and want to get there quickly.”

 

Source: TBJ

 

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A CMBS report from Fitch Ratings projects that the refinancing prospects of the category will be ‘materially weaker” in 2024 than in 2023. It’s one of the main reasons that the firm said that CMBS delinquencies would hit 4.50% in 2024 and 4.90% in 2025.

“Over $31.2 billion, or 1,473 of non-defaulted and non-defeased conduit and agency loans in Fitch-rated U.S. CMBS multiborrower transactions, excluding loans to which Fitch has assigned a credit opinion, are scheduled to mature in 2024,” they wrote. “An additional $37.9 billion or 2,437 loans, mature in 2025. Combined, this is approximately 15% of the Fitch-rated conduit and agency universe by balance and is higher than the $26.5 billion that matured between October 2022 and December 2023.”

Fitch used two different scenarios to see if a loan would meet debt service coverage and loan-to-value ratios to gain refinancing “at higher interest rates relative to in-place weighted average coupons (WAC) and at market capitalization rates.”

Although it didn’t reveal details of the estimates, the two scenarios involved having particular minimum DSCR or LTV values.

For the 2024 maturities, Fitch calculated a likely lower refinance rate than the 73% for maturing loans in the 15 months since October 2022. Currently, under 48% can satisfy the minimum DCSR of 1.75x for an interest-only loan or 1.40x for an agency loan. Only 46% can satisfy a maximum 55% LTV (remembering that properties have seen significant drops in valuation while the interest-only loan won’t have seen reduced principal).

In total, about 50% of the $15.6 billion in maturing loans in 2024 wouldn’t be able to refinance. Borrowers would need to add an average of almost a third of the debt in additional equity and 25% under the LTV scenario requirements for refinancing.

“A slowing economy, elevated borrowing rates and negative lender and investor sentiment will pressure CRE property valuations, capitalization rates and loan performance in 2024,” they wrote.

In 2025, refinancing should improve, according to Fitch. Under the DSCR scenario, 75% of maturing properties should be able to refinance, and under the LTV scenario, 51% should. But about 25% of the maturing loan volume, or $9.3 billion, in 2025 wouldn’t be able to refinance. That would mean additional equity of 15% or 10% of the existing debt under the DSCR and LTV scenarios, respectively, would be needed from owners to pass refinancing thresholds.

 

Source:  GlobeSt.