It’s a bloodbath out there for owners of struggling office buildings who are finally deciding to let go. But that might just be a sign that the office apocalypse has reached a turning point.
“We are far closer to the end of this reckoning than the beginning,” Manus Clancy, the former research director at Trepp and now the head of data strategy at LightBox, recently wrote on LinkedIn.
The CMBS office delinquency rate hit an all-time high of 12.34 percent in January, according to Trepp. The wall of maturing CRE loans, which has been swelling for years, may have finally plateaued. And investors pumped more than $4.3 billion into buying distressed office properties last year, eclipsing the previous 10-year high of $3.8 billion in 2016 and 2024, according to Colliers.
But Clancy said these are indicators that building owners and their lenders are finally ripping off the Band-Aid and that the office market is heading toward stabilization.
“What we’re seeing is the market clearing,” he said. “Buyers and sellers now agree on what the values are in these markets.”
The CMBS distress rate, he said, is somewhat misleading. What tends to happen is that the best, high-quality buildings get refinanced leaving the lower-quality properties that struggle to find a solution left in the data. The denominator effect can push the distress rate higher.
After years of kicking the can down the road, lenders are finally putting an end to “extend and pretend” and moving forward with either foreclosures or short sales. That’s helping with the swell of troubled debt that’s been growing for the past several years.
The wall of maturities is expected to decline this year for the first time since 2022. The Mortgage Bankers Association estimates that $875 billion in commercial mortgages will mature in 2026, down from $957 billion in 2025.
Lenders are getting a better idea of whether particular buildings can recover and have a future operating as offices, according to Xander Snyder, senior CRE economist at First American Title Insurance. That means if someone buys a distressed property at a low enough price, they can rent it out at figures that will attract tenants.
“I think the new business cycle has started,” he said. “But the credit workout phase just takes longer.”
There’s still plenty of distress to work through.
In New York, the $940 million loan on Worldwide Plaza and the $835 million one backing One New York Plaza were sent into special servicing in recent months, helping to push the CMBS delinquency rate to its January peak. In Pittsburgh, the $245 million loan supporting the U.S. Steel Tower was sent to special in March. And in Downtown Los Angeles, Brookfield and its lenders are looking to offload four office buildings totaling 4.9 million square feet — about 18 percent of the Financial District’s inventory — that are in some stage of distress.
Cities like New York and San Francisco have recovered ahead of others. Class A properties are seeing so much demand some are turning tenants away, but many Class B and below buildings continue to struggle.
There was a time during the height of the pandemic when landlords couldn’t rent spaces to tenants at any price. And while there are still properties that are definitely obsolete, leasing markets have gotten better.
Snyder noted that building values and rents have definitely taken a hit from work from home — and in some cases they’re not coming back. Physical office occupancy across 10 cities was 64.5 percent last week, according to Kastle Systems.
And there are concerns about AI and the impact it will have on office jobs in the future. Snyder said that owners who financed their properties with 10-year loans in 2016 or shorter-term debt from 2021 or 2022 will still be refinancing at much higher rates. And that can be catastrophic for highly leveraged borrowers who saw their building values come down.
But he said he thinks the market has reached a turning point and investors are willing to put their money to work.
“A lot of people were expecting a catastrophic fall off the cliff,” he said. “Instead it’s just been grinding along this whole time.”
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