Key Points
A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox. Delinquencies in commercial mortgage-backed securities rose again in January, up 17 basis points from December to 7.47%, according to Trepp. In January 2025, the rate was 6.56%. Last month’s balance of newly delinquent loans totaled just under $5.4 billion, but during the same period, $2.6 billion worth of delinquent loans cured and $1.1 billion paid off. That left a net increase of $1.6 billion in delinquent loans. The increase was driven by the beleaguered office sector, which has a lot of distressed properties to work through but is seeing improvements in fundamentals. Vacancies are finally falling for the first time since 2019. Office CMBS delinquencies rose 103 basis points from December to 12.34%, an all-time high on Trepp’s index dating back to 2000. The previous high was 11.6%, set in October. The rate increase, however, was driven by two exceptionally large New York City properties: Worldwide Plaza ($940 million) and One New York Plaza ($835 million). And while the headline rate is certainly concerning, what’s actually happening with the loans seems less so. “A lot of these loans face cash flow pressure, but they’re still close enough to cash flow positive, or they are cash flow positive, so the borrower has incentive to try and salvage the deal and keep some optionality going for the long run,” said Stephen Buschbom, Trepp’s head of applied research and analytics. “So you end up seeing the borrowers contribute a marginal amount of equity to kick the can down the road and kind of lean into and hope for the return to office, salvaging their equity position.” Buschbom said he believes this will be the year office hits peak delinquency, somewhere between 12% to 13%. Class A, the newer or trophy office buildings, are already seeing much higher occupancy rates, especially in cities where AI is driving new employment. Office conversions to residential, especially in New York City, are also helping mitigate some of the distress. “There’s no, ‘Oh my gosh, the sky’s falling, or this is going to completely change my view on the sector.’ It’s a record high, but same old story. Where do we go from here? Will we continue going higher, or are going to start seeing some positivity?” said Buschbom. He pointed to the fact that the vast majority of the delinquent office loans have been maturity defaults, so they are loans that are being paid but simply can’t be refinanced when they finish their term due to the higher interest rate environment. The lender doesn’t want to foreclose, so in some cases the borrower may inject fresh equity into the loan, not enough to refinance but enough to buy an extension. “We’re seeing a lot of that. It’s not a one-size-fits-all. It’s very much case-dependent,” he added, pointing out that today’s loans are nothing like those from the 2008 financial crisis. “The underwriting and the securitization design are much more disciplined, much lower risk. And, importantly, the servicing aspect has become increasingly efficient. So servicers have gotten much, much quicker at working something out,” Buschbom said.
