Key Points
- Delinquencies on commercial mortgage-backed securities increased again in January, up 17 basis points from December to 7.47%, according to Trepp.
- This increase is driven by the struggling office sector, which is dealing with many distressed properties but whose fundamentals are improving.
- The price increase is due to two exceptionally large New York establishments: Worldwide Plaza and One New York Plaza.
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 on commercial mortgage-backed securities increased 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 new delinquent loans was just under $5.4 billion, but during the same period, $2.6 billion in delinquent loans were settled and $1.1 billion repaid. This left a net increase of $1.6 billion in delinquent loans. This increase is driven by the struggling office sector, which is dealing with many distressed properties but whose fundamentals are improving. Vacancies are finally declining for the first time since 2019. Office CMBS delinquencies increased 103 basis points since December to 12.34%, an all-time high on the Trepp index dating back to 2000. The previous high was 11.6%, set in October. The price increase, however, is due to two exceptionally large New York properties: Worldwide Plaza ($940 million) and One New York Plaza ($835 million). And while the overall rate is certainly concerning, what’s actually happening with the loans seems to be less so. “A lot of these loans are facing cash flow pressures, but they’re still close enough to positive cash flow, or they’re cash flow positive, so the borrower has an incentive to try to salvage the deal and maintain some optionality over the long term,” said Stephen Buschbom, head of applied research and analysis at Trepp. “So you end up seeing borrowers bring in a marginal amount of equity only to throw out the box later and lean in and hope to come back into power, thereby saving their equity position.” Buschbom said he thinks this will be the year the office hits a peak in delinquency, somewhere between 12 and 13 percent. Newer or more prestigious Class A office buildings are already seeing much higher occupancy rates, particularly in cities where AI is generating new jobs. Office-to-residential conversions, particularly in New York, are also helping to alleviate some of the distress. “There’s no ‘Oh my God, the sky is going to fall or this is going to completely change my view of the industry.’ It’s a record, but it’s the same old story. Where do we go from here? Are we going to continue to go higher or are we going to start seeing some positivity?” Buschbom said. He pointed to the fact that the vast majority of delinquent office loans were defaults, so these are loans that are being paid off but that simply cannot be refinanced at the end of their term due to the higher interest rate environment The lender does not want to foreclose on the loan, so in some cases the borrower may inject new equity into the loan, not enough to refinance it, but enough to purchase an extension. This is not a one-size-fits-all solution. It depends a lot on the case,” he added, emphasizing that today’s loans are nothing like those during the 2008 financial crisis. “The underwriting and securitization design is much more disciplined, with much lower risk. And, importantly, the service aspect has become increasingly efficient. So managers became much quicker to find a solution,” Buschbom said.