Office loan delinquencies touch 5% in July as rates, tighter lending conditions bite

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Higher rates and tighter financial conditions took a bigger toll on the U.S. commercial mortgage market last month as more borrowers fell behind on debt payments. The delinquency rate of commercial property loans that Wall Street packaged into bond deals increased 51 basis points in July to 4.41% for loans at least 30 days past due, according to Trepp, which tracks commercial mortgage-backed securities market data. It ticked even higher to 5% for office loans, a segment of the market that’s been a worry for the Federal Reserve and the Treasury Department, including as prices for half-empty buildings wobble and as trillions of dollars in debt matures in a regime of higher borrowing costs. See: The $1 trillion ‘wall of worry’ for commercial real estate that spirals through 2027 The below chart shows the sharp uptick in office loans in commercial mortgage-backed securities deals since December. While Wall Street bond deals are backed by dozens of loans on a range of property types, retail loans still had the highest delinquency rate of 6.9% in July, followed by lodging at 5.9%, according to Trepp. Trepp While the sector’s overall loan delinquencies now sit at the highest level since December 2021, they still remain below the 10.3% record set in July 2012 in the wake of the global financial crisis. However, with the benchmark 10-year Treasury yield TMUBMUSD10Y, 4.032% pushing back above 4%, rates on commercial mortgage loans aren’t expected to soon retreat back to an era of cheap debt. “While the rest of the U.S. economy has seen relief in terms of higher equity prices, better-than-expected corporate earnings, and falling inflation numbers, the commercial real estate (CRE) market continues to be left behind,” Trepp analysts wrote, in a Tuesday client note. The S&P 500 index SPX, -0.27% closed Tuesday less than 5% below its record finish in January 2022, while the Dow Jones Industrial Average DJIA, +0.20% ended 3.2% off its last record finish, according to Dow Jones Market Data. Read next: San Francisco’s push to turn office buildings into homes hinges on this simple idea