Delinquency rates for office loans in the United States have surged to 4.47% due to the impact of hybrid work on demand, according to a report by Moody’s Investors Service. The delinquency rate rose by 124 basis points in the second quarter, with $1.63 billion in office loans becoming delinquent from April to June. The report predicts that office defaults will continue to increase throughout 2023 as refinancing standards for office spaces have tightened. Factors contributing to this trend include higher office vacancy levels and growing concerns about the long-term implications of hybrid work on lease demand.
The rise in delinquency rates can be attributed to the popularity of remote work during the COVID-19 pandemic, which has resulted in high vacancy rates for office buildings in many cities. Meanwhile, Moody’s also reported a slight increase in CMBS issuance in the second quarter, reaching $3.7 billion compared to $3.3 billion in the previous quarter. Office loans accounted for 18.5% of CMBS issuance in the second quarter.
The report highlighted that four out of the ten largest newly delinquent loans in Q2 2023 were secured by office loans, indicating the challenges faced by the sector. Additionally, the delinquency rate for regional mall loans increased from 20.13% in March to 21.41% in June. Similarly, four out of the top ten newly delinquent loans in Q2 2023 were secured by regional malls. The delinquency rates for multifamily and hotel loans also saw a slight increase in June, reaching 1.37% and 5.79% respectively, compared to 1.22% and 5.63% at the end of the first quarter. The retail delinquency rate also rose by 13 basis points during the quarter, reaching 8.03%.
The findings highlight the challenges faced by various sectors in the commercial real estate market as a result of the ongoing changes in work patterns and the lasting effects of the pandemic. As remote work remains popular, demands for office spaces have weakened, leading to increased default rates for office loans. The rise in delinquency rates across different sectors indicates the ongoing struggles faced by the commercial real estate market.
Overall, the report suggests that the consequences of hybrid work and shifting consumer preferences will continue to impact the commercial real estate industry, potentially leading to further delinquencies and defaults in the coming years. These trends underline the need for careful analysis and risk assessment in the sector as stakeholders navigate the evolving landscape of the post-pandemic work environment.
