Office loans just hit a 5% delinquency rate – a 20-month high – as WFH and rate rises pile more pressure on commercial real estate
- It's the costliest time to borrow money as interest rates now stand at 5.5%.
- Commercial real estate has been particularly damaged by the Fed's rate-hiking campaign.
The US commercial real-estate sector is in a prolonged rut. The combination of workers unwilling to return to the office, coupled with the highest interest rates in 22 years, has spelled misery for the sector over the last 18 months.
Commercial real estate has been particularly troubled by the Fed's aggressive hiking campaign, which has pushed up interest rates sharply since spring 2022.
Though aimed at cooling inflation, the rate rises have increased the cost of commercial mortgages and made debt refinancing considerably more expensive.
Now, the sector is grappling with a rise in delinquencies as the consequences of the Fed's decisions begin to reverberate through the market.
According to MarketWatch data obtained from Trepp released on Tuesday, office-loan delinquency rates have touched 5% as more companies default on their commercial mortgage-backed securities.
Borrowers are struggling to repay under tighter financial conditions and waning demand for office space — and the downturn shows no signs of easing.
Kiran Raichura, deputy chief property economist for Capital Economics, said last month that office values were unlikely to rebound to their peaks for another decade or two, thanks to the rise of work from home.
"It's quite possible to see that recovery take much longer than the 15 years that we've penciled in, and it could be well into the mid-2040s even," he said.
While the overall delinquency rate for commercial property stands at its highest level since December 2021, it's still below half the 10.3% level hit in July 2012 in the wake of the financial crisis, the MarketWatch data shows.