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
