Office CMBS Delinquency Rate Spikes to Nightmare Levels, Malls Have Been a Nightmare for Years

Lodging is Bad, Multifamily hangs in there, Industrial remains unscathed.

By Wolf Richter for WOLF STREET.

As we have found out in the recent episodes of the commercial real estate nightmare, with landlords stiffing their creditors by either walking away from properties or loans and letting lenders take the massive losses: Those lenders have turned out to be mostly investors in Commercial Mortgage-Backed Securities (CMBS), Collateralized Loan Obligations (CLOs), and mortgage-REITS, not banks. Banks are taking some hits too, but not like these investors. Which gave rise to the theory around here that banks securitized most of their riskiest and worst CRE loans and sloughed them off years ago to investors that were chasing yield.

So the delinquency rate of commercial mortgages on office properties that had been securitized into CMBS spiked to 5.6% by loan balance in September, having more than tripled so far this year, from a delinquency rate of 1.6% in December, according to Trepp, which tracks and analyzes CMBS.

The cycle during the Financial Crisis, when delinquency rates eventually exceeded 10% in 2012 and 2013, started more slowly and proceeded more slowly than this cycle. This is a ferocious deterioration:

This time around, the landlords are walking away from the office properties or mortgages for two reasons:

  1. Huge vacancy rates that are now a structural problem as Corporate America has discovered that it doesn’t need and won’t ever need all this office space;
  2. CRE mortgage rates that have more than doubled, which is a killer when variable-rate mortgages aren’t sufficiently hedged, and it’s a killer when a maturing 3.5% fixed-rate mortgage needs to be refinanced with an 8% mortgage.

When this occurs, the interest expense that the landlord has to deal with can no longer be covered by rents, especially if the building has a low occupancy rate. And then it’s just a money pit. The landlord gives up the building, takes the loss on their equity, and lets these investors take the remaining losses.

The fate is even worse for mall CMBS. Mortgages for malls have been in trouble for over a decade due to a structural shift to ecommerce that has killed innumerable malls – a process that I have called brick-and-mortar meltdown since 2016. It has caused landlords – even the biggest mall landlords, Simon Property Group and Brookfield – to walk away from mall after mall and let these investors take the losses. Zombie malls are everywhere. Eventually developers end up with them, bulldoze them, and build something else on that land, such as housing. And all along the way, CMBS investors have taken massive losses.

The delinquency rate of retail CMBS surged during the Financial Crisis. In the years after the Financial Crisis, as these loans were either taken out of the index after foreclosure or as the delinquency was cured, the default rate declined to just under a still high 4%, when the pandemic hit, and delinquencies spiked.

In September, the delinquency rate ticked up to 6.92%:

Lodging CMBS delinquency rates exploded during the Financial Crisis and during the pandemic, but then recovered, sort of. Lodging delinquencies remained high in September at 5.3%, roughly unchanged from August, but down from July (5.9%), and over three times the rate in 2019:

Multifamily delinquencies have been bobbing along relatively low levels still. In September, they ticked up to 1.85%. These are “private label” CMBS, not multifamily mortgages backed by the government.

There have been some big delinquencies, including the mortgages backed by a portfolio of 75 apartment buildings owned by Veritas in San Francisco, which caused the delinquency rate to jump in December 2022.

There is demand for apartments, unlike offices, and it’s not a problem of not being able to find tenants. The problem with some of these mortgages is the interest cost. When the mortgage comes due and has to be refinanced with a much higher rate, or if it’s a variable-rate mortgage, then the difficulties arise.

In the chart below, the plunge in the delinquency rate in January 2016 occurred because a huge delinquent loan was resolved, backed by Stuyvesant Town–Peter Cooper Village, a residential development in Manhattan with 110 apartment buildings. Blackstone and Ivanhoe Cambridge agreed to pay $5.3 billion in 2015 for the 80-acre property. After the deal closed in December 2015, the $3 billion in CMBS loans tied to the property was paid off, triggering the drop in the CMBS delinquency rate in January 2016.

Industrial delinquencies remain low. These loans are backed by warehouses and fulfillment centers, and they have been in high demand due to the boom in ecommerce. Demand has softened a little, as Amazon walked back some of its massive expansion plans.  But in September, delinquency rates remained at 0.3%, the envy of the other major categories:

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  127 comments for “Office CMBS Delinquency Rate Spikes to Nightmare Levels, Malls Have Been a Nightmare for Years

  1. Leo says:

    Commercial RE is worse for investors, Housing RE is worse for RE professionals.

    NAR narrative of higher housing prices is causing unaffordability. This is causing lower house sales (40% lower in Northwest) and lower commissions for real estate agents. As a result this year bankruptcies in Real Estate sector has exploded, and real estate sector is leading all other sectors in bankruptcy filings. Also this year already has highest bankruptcies in last 10 years.

    So NAR is bankrupting and screwing the 2 million smaller real estate agents. This is because NAR leadership now consists of big REIT investors, REIT managers, Wall Street RE funds and other Real Estate investors that hold multiple homes. In other words, the NAR leadership doesn’t earn from commissions, but from value of their Assets. So as the interest rate rises, NAR leadership spreads misinformation to protect their leveraged bets.

    This creates a major conflict of interest and NAR has no problem screwing the little agents. It’s time Real Estate Agents and other professionals (Appraisers, Inspectors etc) grew balls and brought NAR to its senses before thousands of these professionals go bankrupt.

    • Caveman says:

      Hard times for hard working RE agents?

      Breaks my heart.

      • Lili Von Schtupp says:

        Buyer’s agent called my yesterday to see where I’m at, and while usually jovial he sounded notably frustrated and snappy in tone. Told him I ain’t, I see the listings come through and everything in my range is in worse shape by the day while interest rates climb.

        He informed me he’s only interested in ‘motivated buyers’, that the house prices are set by the seller (duh) not determined by the buyer (oh, dear), and that the market is still hot (locally, yes).

        I reminded him that something is only worth what someone will pay for it, and personally I’m not paying these prices for humble houses in these conditions (rotting, never updated or maintained and needing significant costly repairs–not just cosmetic stuff). But godspeed to those who will.

        I asked how he was doing, to be friendly, the reply was more deflecting and gaslighting so I wished him well until next we speak.

      • CCCB says:

        It’s time the average realtor either got out of the business or started working more and producing more.

        The average realtor does FOUR, YES FOUR transactions a year. They arent qualfied to call themselves realtors at that pace. I certainly wouldnt want any of those working for my brokerage unless they were four $25 mil+ houses.

        It’s the old 90 – 10 rule. 90% of the business is done by 10% of the realtors. Here’s another 90% rule. 90% of all real estate agents fail within three years.

        Lastly, how do you figure NAR is responsible for high house prices. Dumb comment. Thats the craziest thing I’ve heard yet. Is NAR buying up all the cheap homes and giving them to the non producing realtors to live in?

      • NBay says:

        This is for Leo, I wanted it closer to his comment, Caveman.

        So we have a “free market” being controlled by these larger players and the “little agents”, as you say, are being screwed? That is NOT how this mechanism is supposed to work, and why so many believe in “the free market” being required for any and all well functioning economy?

        So, what do these losers do? They are all certified “professionals”, so we can write off any skills or intelligence difference as the cause.

        Pray to the Invisible Hands? The hands do appear to exist in a spiritual world, Adam Smith himself speaks of them in that way.

        (I know asking for government help or regulations is the road to communism, and we certainly don’t want that!)

        So I am curious just WHAT do all these 2 million “little agent” losers do once they “grow balls” (except for the female agents, of course, who I guess could grow ovaries)?

        • NBay says:

          Also, excuse me if you are just blowing off steam and your comment is rhetorical or sarcasm.
          Since most all I know about economics comes from reading this site (I never even bought a house) I often fail to catch nuances from those who understand far more economic stuff than me, but I feel the same economic stress most everyone does.
          (Except for the “big asset bunch” as you just pointed out)
          One would think people are smart enough to balance things better, agreed?

    • Digger Dave says:

      But this won’t happen, because technology should have already destroyed this monopoly, save for the protectionism written into every state’s laws. Good luck outlobbying them.

      Personally I always thought that some type of insider trading provision with teeth would also do the same. It seems grossly manipulative and tilted that real estate companies can buy things directly from sellers, often at prices way below market. If someone contacts an agent about even a possible sales transaction the agent, their brokerage and anyone they’ve ever been personally involved with in a transaction and all other agents/brokerages should be prohibited from buying it until it has been listed for at least 6 months.

      This would solve a lot of soft corruption in that industry. Of course any smaller operation or agent that goes out of business hasn’t figured out this part of the game yet, or they’re just too honest. Sorry for the cynicism, but I’ve been tangled with this industry for too long now to have any faith that their actions are above board.

      • VintageVNvet says:

        After fifty plus years working in the industry, with some, just a couple, really outstanding exceptions DD, I agree with you about the corruption of the RE industry, especially the residential part.
        It should be noted that most if not all agents will buy first, then ”unload” onto suckers at a good profit, without ever revealing their manipulations of both sellers and buyers.
        This while spouting all kinds of nonsense about ethics, etc.
        Maybe even worse than used car folks, at least just as bad,,, right up there with other [[ professionals… ]]

        • joe2 says:

          I’m in a negotiation for a mall lease for space for an LLC personal services business where the landlord wants a 100% personal guarantee on the full term of the lease . Should I sign it?

        • Wolf Richter says:

          Ask the landlord if WeWork executives personally guaranteed the leases that WeWork’s LLCs signed, LOL.

          If the landlord has some vacancies, he might be flexible. If that’s the last slot he has available, he might not be. You could say, “hmm, actually, as a matter of legal principle, I don’t personally guarantee anything a corporation does…” and see if that opens up a discussion or closes the door.

        • Tom S. says:

          Market makers can make markets. It’s a competitive industry and the little guy pays a fee for the pricing efficiencies. At face value I don’t have a problem with it. Now does one inside player set the prices and move the market in a desired direction? Or do buyers and sellers have real options when it comes to RE agencies?

        • joedidee says:

          seems like caveat emptor
          99% business fail
          so good luck

        • joe2 says:

          Wolf – As all of the people that I don’t trust have been telling me, all commercial leases now contain personal guarantee clauses. Whatever, these are unacceptable to me. I offered what is a substantially better deal to the landlord – 6 months security deposit from a company with a 20 year history of on-time rent payments. Essentially a free loan for 10 years. If he won’t take that I can’t trust his motives. The gaslighting is intense – RE seller agent and a lawyer who goes through the motions. But I’ve been through this before.

        • Wolf Richter says:

          You’re right. And it’s worth a try.

          I fought this battle in about 1992 for my boss, and lost. He didn’t want to sign a personal guarantee on a commercial mortgage (not lease) when we tried to do a cash-out refi on the property to renovate and expand the property. I fought hard for my boss. But we just could not get any bank to agree to do a cash-out refi without a personal guarantee on a 9-acre commercial property. And ultimately, my boss signed the personal guarantee, and the deal went through and caused no problems.

          It’s worth a try to get around personal guarantees. But we weren’t able to.

          If a chain store wants to move into the property you’re looking at, no one has to sign a personal guarantee. Just independent small business owners.

          I think CRE landlords are now really careful. Lots of them are getting burned.

        • joe2 says:

          Wolf – “my boss signed the personal guarantee, and the deal went through and caused no problems.”

          In 1992 would you have believed me if I told you the government would shut your business down for a pandemic but you were still responsible for rent and utilities and insurance and taxes? And it took one year for your customers to return?

      • Arnold says:

        6% is a huge amount of money to sell a property. Only automobile dealerships exceed that for such a simple transaction.

        • JimBob says:

          That’s why I bought my AZ home FSBO.

          Great house…saved ~ $18,000 RE commission. Never saw the value of a RE agent, even though a close friend is one.

          Drive around to open houses and hire a reputable home inspector.

        • roddy6667 says:

          Back in the Seventies a friend of mine was a RE broker. He was the first person I knew to make a video of a house showing, so buyers could sit in the office and view properties. I thought this would put agents and the 6% commission out of business. Almost 50 years later, most buyers and sellers are still using agents and paying 6%. It doesn’t matter that a lot of people don’t agree with this or understand it, but there are still a lot of reasons why people do this. To each his ow.

        • 91B20 1stCav (AUS) says:

          Roddy – I’m not sure if a typo or slyly slipped in, but ‘to each his ow’ (‘!’ or ‘e’) sprayed my cafe and lightened my am!

          may we all find a better day.

        • joedidee says:

          for those who HAVE experience
          however 99% do not
          so good luck SAVING $18k

      • Jason says:

        You’re definitely not wrong. I’m an registered investment advisor and the only way I manage to find a little enjoyment while dealing with RE agents over the years is seeing the looks on their faces when I blow up their statements about the essentially risk free nature of RE investing. Truthfully, most of them can’t get their heads around the actual numbers – they just parrot what they’ve been told or heard over the years. One of my go to statements when they say a certain property is a GREAT deal is ‘lets be honest with each other, if it was such a great deal I wouldn’t ever see it because you or someone you work with would have scooped it up already.’.

        • joe2 says:

          So true. 99% are gaslighters pumping sunshine up your butt and meanwhile looking to front-run good deals.

    • Anurag says:

      Bailouts when?

  2. kiers says:

    I’m curious…why was office CMBS delinquencies in a peak of ~8% in mid 2017?

    • Wolf Richter says:

      The oil bust of 2014-2020 had a big impact on offices because hundreds of oil-and-gas companies went bankrupt. And all oil and gas companies laid off people and shrank their footprint to survive. The huge office sector in Houston was in terrible shape, starting in 2015, with availability rates eventually reaching well over 30%. The office markets of other cities in the oil patch got hit too.

  3. Gary says:

    These industrial CMBS may be the big buildings in industrial areas held by real estate firms specializing in such. Driving through these, they are full of businesses producing the type of jobs that Jerome Powell is talking about increasing inflation through a severe imbalance in the labor market. However, a better labor market balance may not produce delinquencies as these commercial real estate firms simply ride the ups and downs.

  4. georgist says:

    Just anecdotally I work for a big company that has and office in Canada with about 1500 or so people.
    Most days there are *many* empty desks, and we have 1.4 people per desk.
    The company has threatened staff with the sack if they don’t come in 3 times a week.
    Despite the imminent recession, people are still not complying.
    It’s surprising and fascinating to watch.

    • Candyman says:

      There is no “imminent ” recession coming. Maybe April of 2024 there will be some unemployment news, but for now , through the 4 qrt. and 1st qrt of 24, the drunken sailors will be spending!

      • The Liberty Advocate says:

        This won’t age well. GDI says we were already in recession. We had one quarter print slightly in the positive. I’m sure it will be negative next quarter though. And those layoffs and job losses will be coming in fast and hard this fall and winter.

        • Wolf Richter says:

          “This won’t age well. GDI says we were already in recession.”

          LOL. GDI for the past several quarters got revised up heavily last week. And that recession indicator went up in smoke. Your recession-monger buddies didn’t write about that, did they?

        • joedidee says:

          wolf and his hysteria
          GDI is key and GDP is fool of govt

        • Wolf Richter says:


          Your recession-monger morons didn’t tell you that GDI was heavily revised upward last week for several quarters back, and all the negative values vanished, and the recession alarm vanished? LOL, your recession-monger morons kept this quiet, didn’t they? And you fell for their bullshit. Don’t spread it here.

          Look up GDI now!

        • CCCB says:

          TLA has probably been predicting a housing crash for the last two years too.

          Wishful thinking from those who missed our 12 year boom in the housing market

        • JimL says:

          You are right. Your comment aged very poorly. Laughingly so.

          Keep peddling the BS, keep getting laughed at. Don’t worry, eventually you will be right.

      • Gomp says:

        If wishes & butts were candy & nuts, we’d all have a very Merry Christmas.

      • JimL says:

        There is always an imminent recession. Always. The problem is that it might be in a few months, a few years, or longer.

        It depends how you define imminent.

    • Arnold says:

      We are in day 438 of the Wolfstreet recession watch.

  5. MM says:

    Re residenrial multifamily:

    “The problem with some of these mortgages is the interest cost. When the mortgage comes due and has to be refinanced with a much higher rate, or if it’s a variable-rate mortgage, then the difficulties arise.”

    I imagine this will put even more upwards pressure on apartment rents overall.

    • The Liberty Advocate says:

      Or the property is turned over to the investors, it is sold at a loss, and rents go down.

      • BS ini says:

        Yep all depends on quality . Eventually the FRB higher rates will tackle CPI and CPE and thank goodness they are raising rates and reducing balance sheet. Higher for longer because as Powell and Wolf says something is broken already and that’s inflation.

      • joedidee says:

        why would I reduce rents when I get deal
        I’m always looking at MARKET RATES
        it’s why I buy and get my 15% ROI or I pass

    • LPM says:

      when we qualify a mortgage. we usually make it so it can be paid off in 60 months with the income the property produces. what are these owners doing with the income if they aren’t using it to pay off the mortgage? Sounds like dis-information to me.

      • ApartmentInvestor says:

        LPM writes:

        > when we qualify a mortgage. we usually make it so
        > it can be paid off in 60 months with the income
        > the property produces.

        What are the average LTV of your loans? It seems like you must be putting down more than 75% to have enough cash flow to pay off your loans in 5 years

        • roddy6667 says:

          I agree. The numbers just don’t work without a nearly cash purchase.

        • Jason says:

          Right and the cash down payment has it’s own cost that has to be considered (hurdle rate is at least 5% these days) – that’s real income you forgo when using cash for down payment. ROI calculation is not accurate if this isn’t considered.

    • Fed up says:

      Good luck getting renters who can pay it. Rents are coming down in the Phx area big time along with apartments offering some hefty concessions. Been happening since May. Ya can’t squeeze blood out of a turnip.

      • Fed up says:

        I know of what I’m saying. Been renting since I sold my Phx house. Am enjoying somewhat of a renter’s market.

        • Chris8101 says:

          Huge number of apartments built and being built in the Phoenix/Scottsdale area. Supply is way up.

        • Einhal says:

          Same thing in South Florida. I’m seeing a huge amount of rent reductions.

        • Fedup says:

          Chris, you are partially correct. But I know people can’t afford the ridiculous inflated rents that occurred during the plandemic. So it’s on both the supply and demand sides affecting the market now.

        • CCCB says:

          I haven’t lowered rents in Miami since 2010 ñ, and that was only because deadbeat borrowers stopped paying mortgages and condo fees on their properties and undercut the market. They put the rent money straight into their pockets while screwing the lenders and the associations. Most of those idiots flamed out, lost all their properties and went broke.

      • MM says:

        There’s always someone who will pay it – at least in the market I rented in for nearly a decade (Boston).

        Had one landlord who bragged he can always find college kids with wealthy parents who pay the rent, so he can charge whatever.

        There are TONS of new apt complexes in Boston, but they’re all luxury units. Last one I looked at wanted 6K/mo for a studio!

        Its just like the housing (for purchase) market – plenty of supply of luxury properties, but the lower-tier stuff that us working stiffs can afford is still limited.

        • MM says:

          For comparison – my first apartment just outside of Boston (Waltham specifically) was $1900/mo, and I split it with four roommates, ergo we each paid $375/mo.

          I doubt rents are nearly this cheap anymore, but this is what I mean by the low end of the apt market.

      • Steve says:

        So what exactly is a renters collapse/exodus as I term it, which occurs at the ends of business cycles? It is anybody or any entity which rents or leases any type of property who UNWILLINGLY moves because they can not make their rent, or refuses to pay. The pandemic started work from home which killed office rents. But the real killer is inflation which is substituting home for office, saving rent money. CRE now is in bust mode from its bubble peak and gets huge markdowns on its sales. This first sector I guess takes 3-5 years to sell out, stabilize, and new buyers can offer lower leases. Next is industrial which will follow because you guessed it 7% is not sustainable on refinancing loans and the trickle down slowing weighs on industrial. But what has just started, as in 2008, is the residential renters exodus/collapse from this super inflation business cycle. Yes jobs are going but only from massive retiring and free money fake jobs and such imho. Most of this is replacement, not organic growth. Plus all the pandemic type jobs and IPO manias and tech startups were mostly unsustainable and now zombies, rightfully so. Layoffs coming, but with disguises But now we have crushing inflation and what happens to residential renters who have no intention of moving? UAW workers have no intention of moving. People simply run out of money, or lose their job, or say I must downsize. What to do? Five options in a renters collapse/exodus cause you must go. The preferred option is downsizing in your area to something you can afford if your job is stable. The next option is moving in with another. Not fun but better than what remains. Next people move to outskirt cities thinking rents are way cheaper. Risky, not much work. Next is a move out of State Traumatic with jod stability risk too. And lastly, the last two are sad. People will move to the street, or back to a home country. This is not churn but full collapse. Living in cars is hard. This is what a renters collapse/exodus looks like, and it’s what took down the economy in 2008 bringing on the GFC. Even people with the liar loans could have made their payments if they didnt lose the renter. So here’s inflation, super unsustainable Fed inflation, and now here comes the equilibrium, the renter exodus/collapse. It was inevitable. All these strikes, office closures and similar I count these as layoffs in disguise for the effect is the same. See rents going down anywhere? For rent/for lease signs anywhere? If you see them everywhere, you know what came before, what is now, and whats coming. This is how a real estate bubble gets popped, and the biggest bubble in history gets that mountainous chart downside, equal or greater than its upside, just like in 2008, possible more extreme. I hope you’ve been shorting homebuilders. They might reach their all time lows, again, next year/two.

        • Burt Reynolds Wrap says:

          I appreciate what you wrote. If you are not dead on, you are at least providing a thought out realistic example of how things could go. That’s worth reading. You don’t need to be exactly right, provoking deeper thoughts and adding perspective for analyzing the situation is valuable.

        • JeffD says:

          You left out stories about evictions, people who game the system to stay in their rental for years using legal tricks, and tenants who trash the place for the landlord charging rents that were “too high”. There are lots of stories out there about having to pay tenants tens of thousands of dollars to leave, in some cases.

  6. JeffD says:

    Essentially every problem we have out there today is because governing bodies keep saying “yes” to every cockamamie idea that crosses their desk, proportional to how much it theoretically increases the amount of (non-)bank financing or tax revenues in the system.

    • DawnsEarlyLight says:

      Please, Federal Government/Fed, keep your hanfs off of this mess!

  7. ApartmentInvestor says:

    Wolf wrote:

    > There have been some big delinquencies, including the mortgages
    > backed by a portfolio of 75 apartment buildings owned by Veritas
    > in San Francisco, which caused the delinquency rate to jump in
    > December 2022.

    The apartment market as a whole is in good shape but in the last ten years a LOT of new money (with little apartment experience) came into the market overpaying for buildings and hoping the low variable rate loans were here to stay and rents just kept going up. Today with variable rate interest rates going up and rent growth slowing people like the young guys running Tides Equites in S Cal (who somehow managed to acquire a ~30,000 unit ~$7 BILLION apartment portfolio in only about five years) are in a world of hurt. There are also guys like Grant Cardone who have jumped into the apartment business with OPM who seem to be aware that it takes a lot of people and a lot of work to actually run a successful apartment portfolio (you can’t just buy a Billion dollars worth of multi-family RE and sit at home waiting for the checks to come in).

    • cas127 says:

      The Houston Applesway apartment implosion (3200 units, $200 million in *variable* debt) from earlier this year can serve as a model for the extent of “dumb money” that flooded into the apartment sector in the wake of 20 years of ZIRP (“Yield!! For the love of God, I must have yield!!”).

      Applesway blew up in approximately 3 to 4 years…that is a pretty darn short period of time to go from fund formation to bk…during possibly the greatest surge in rent rates in recent memory (maybe US history…).

      But those two things are quite possibly related…all those newbie apartment investors (suckered in when apartment funds were promising 7% when Treasuries were paying 3%) got desperate/hysterical between pandemic eviction moratoria and rising interest rates (on their leverage-friendly variable rate loans).

      So they put the screws to tenants in a historical fashion (20%-30% rent hikes, largely nationwide, in 1 to 2 years). On people’s largest expense…housing.

      But you can’t get blood from a stone (not for long).

      I suspect a *lot* more Applesways are rotting just below the surface.

      Perhaps the apartment speculators and banks are furiously doing renegotiations/loan workouts…but maybe not (borrowers only have so much equity to trade away to the lending banks in exchange for loosening of loan terms).

      It would be fantastic to hear from more experienced apartment borrowers/lenders on the board.

      The detailed dynamics of loan workouts are fascinating/enlightening.

    • Steve says:

      Newsflash: Distressed renters from inflation and unsustainable high rents. People sad, angry and frustrated. Taking action.

  8. kramartini says:

    Classic mismatch of assets and liabilities.

  9. longstreet says:

    So many malls in my area, be they big shopping malls or strip malls…..

    being entirely or partially converted to condos and apartments…..
    many looking just the same…..
    a cluster of abodes with shops and restaurants on level one. Common areas. Little villages.
    AND, because of the timing of all this, I presume the plans and investments were all accomplished when rates were much much lower……at least 12 to 16 months ago.
    They may have just shifted their problem from empty shopping malls to empty condos and apartments.

    • ApartmentInvestor says:

      Longstreet wrote:

      > So many malls in my area, be they big shopping malls
      > or strip malls….. being entirely or partially converted
      > to condos and apartments…..many looking just the same…..

      Are they “converting” the property to condos or apartments or tearing them down and “rebuilding”?

      A friend in Marin sent me a funny link to the former “office” space at 777 Grand in San Rafael that was “converted” to an “apartment”.

      The “conversion” involved putting a some Home Depot cabinets on a wall to make a “kitchen” and put a washer and dryer on another wall to make a “laundry room”

      • 91B20 1stCav (AUS) says:

        AI – redux of the ‘lofting’ movement converting obsolete manufacturing spaces in NYC of several decades ago (difference being it’s no longer ‘under the radar’, the ‘establishment having subverted the dominant paradigm’…)?

        may we all find a better day.

    • Steve says:


  10. WB says:

    CRE was a house of cards from the beginning, why is everyone acting surprised that a small gust of wind if blowing the house of cards down. What I want to know is who/what entities will ultimately end up getting a tax-payer funded BAILOUT and how do we front-run the shit-show? Same as it ever was, more so in an election year.

    Too cynical perhaps, but I haven’t had much coffee yet…

  11. Swamp Creature says:

    No one cares about the CMBS market. If it collapses, so what! What is concerning is the 10 year just spiked to 4.75%. It’s heading for 5%. Mortgages will be soon 8.25%. You can kiss the residential Real estate post pandemic recovery goodby. Ms Swamp has not even seen a case to appraise for the last two weeks. No one can afford these houses, except the rich and the corporate speculators. When the residential mortgage market freezes up everything else will follow. We’re now joining the drunken sailors and spending most of our new free time in sports bars getting plastered and betting on sports games. The economy is finished.

    • kramartini says:

      The corporate speculators will be selling soon leaving over-stretched consumers holding the bag…

    • Tom Sarelas says:

      Netflix streaming The Big Short – big banks bigger, same rating agencies, CDOs renamed – I think now Bespoke Debt Obligations. Bespoke, creative group. Buckle up. TFS

    • Wolf Richter says:

      Swamp Creature,

      “No one cares about the CMBS market.”

      LOL. You should have said: “I don’t care about the CMBS market.”

    • 91B20 1stCav (AUS) says:

      SC – methinks point-shaving is coming (if not already here) to your favorite sports, soon…

      may we all find a better day.

      • 91B20 1stCav (AUS) says:

        (…insider trading is where one finds it…).

        may we all find a better day.

    • Steve says:

      Mrs Swamp is not alone. I sell used work vehicles and have not even an inquiry lately and I have high demand vehicles, low miles and prices as much as 50% lower than the cheapest dealer. Everything in $8k – $14k range. Crickets. My business is a leading indicator. Im existing on savings.

      • Burt Reynolds Wrap says:

        What’s the market on used good condition work vans? I noticed quite a few people seem to be living out of work vans at the truck stop I go to, the newer sprinter body styles. It seems like a significant uptick. Truck stops often get people living in or sleeping in their vehicles, in addition to the professional truck drivers but I noticed ‘the scene’ seemed to have shifted noticeably in the last month. Some of the vans are higher end, some are just a cargo vans with no additional equipment. I’ve seen some box trucks that people live in too. I think a box truck or step van would provide a more realistic living space geometry and dimensions. The sprinter vans are just too narrow for living in for the long term. Obviously load capacities and fuel consumption will likely be much higher on a box truck or step van. I need just the box from a box truck to mount it on a lower to the ground trailer platform. Houses are ridiculously expensive. I’d rather make a well thought out living cube than spend a decade or more polishing a dilapidated turd of a house since they’re not built to last.

    • CCCB says:

      “No one can afford these houese except the rich and the corporte speculators”

      WRONG! 4 million houses will sell this year. Less than 20% will sell to investors (a large percentage of these to mom and pop landlords). So the other 3.2 million buyers are all billionaires and multi millionaires – wrong again

  12. Nick Kelly says:

    ‘Eventually developers end up with them, bulldoze them, and build something else on that land, such as housing.’

    It’s been a while since I watched the zombie mall vids but I wonder how many still lay abandoned for decades. It might take a brave developer to buy one to bulldoze now. Don’t know about there, but here dumping fees are way up.

    Re: coming recession in Canada. Headline in Globe Real Estate section a few days ago: ‘For Sellers, Toronto is Deadsville’

    20 % of Can mortgages are in extended amort or neg amort, meaning the guy owes more each month after his payment. Canada is at least 50% more exposed to res RE than the US.

    One of the Big Six, either BMO or TD, so pissed off the regulator about its over exposure, he insisted on addressing the board. On too many the HELOC plus mortgage exceeded property value.

    Extended amort can be done so many times, and the prob with a ‘sellers strike’ is that they aren’t a union. Individual circumstances will force sales and will be used for ALL appraisals. The banks are not going to nurse mortgagors too long while watching their security, the equity, drain away. They know it might drain slowly, then quickly.

    Related QT and RE. Turkey just did the unimaginable, raised rates 500 basis points to 30%. It has 2 million new unsold homes.

    How was its Central Bank able to ignore Erdogan, who has maintained for a decade that inflation should be fought with lower interest rates? Turkey’s situation had become so desperate, there was no choice but the IMF. Erdogan, who had fired several heads of Turkey’s Bank, and replaced them folks like a son- in- law etc., knew the jig was up but he was able to squeeze out the last juice to get re-elected, just BEFORE taking the Fund’s nasty medicine. So long delayed, it must now be taken all at once.

    Whatever the problems with a Central Bank, they are worse when it does the bidding of a politician.

    • 91B20 1stCav (AUS) says:

      Nick – mebbe they were expecting a rush of folks like old poster ‘Frederick’, an expat usually extolling life there at the time (recall he was posting from Warsaw most recently-what say you, Fred?).

      may we all find a better day.

    • JimL says:

      Whenever I see the term “zombie mall”, I think of the Blues Brothers movie (original) and how the mall scene was filmed in a closing mall near my house at the time.

      “Did you get me my Cheese Wiz, boy?”

      Good stuff.

  13. Mike R. says:

    Only malls in rich areas will survive through support of the 5%. Others have been failing in slow motion for years.

    Don’t worry about multi-family housing. Any defaults will be backstopped by government and transferred to HUD to be used for low income housing. That was always the plan started back in Obama’s regime.

    Office space will continue to default. We’ve created too many BS jobs on computers where people can work anywhere. They are BS jobs because any function that doesn’t require signficant team work and in person interaction is usually BS.

    • ru82 says:

      “Don’t worry about multi-family housing. Any defaults will be backstopped by government and transferred to HUD to be used for low income housing”

      I never thought of that. Makes sense. Quickly create some affordable housing.

      • Mike R says:

        That’s why Fannie and Freddie have provided all the loans and aren’t concerned about overbuild.

    • JimL says:

      You forgot to yell at the kids to get off your lawn.

  14. Gabriel says:

    If multi family is apartments, what does lodging represent? Hotels?

    • Wolf Richter says:

      Yes, lodging = hotels, motels, lodges, resorts, etc.

      There are smaller categories such as student housing, luxury student housing, self-storage, etc. I just discussed the biggest categories.

      • ApartmentInvestor says:

        Wolf wrote:

        > Yes, lodging = hotels, motels, lodges, resorts, etc.

        There are some exceptions (like the rich guy that lives in a hotel or an apartment owner that has a couple AirBnB units) but almost all “lodging” is rented for LESS than 30 days and almost all multifamily is rented for MORE than 30 days.

  15. Hubberts Curve says:

    I get industrial auction flyers ( by email) on a daily basis. You can tell a lot about the economy by which facilities are being auctioned off. A few days ago I got one for Honeywell auctioning off their warehouse automation factory in Ohio. They built things like conveyors, package sorting equipment etc. This was a fairly new factory with state of the art equipment purchased in the last few years. I looked up stories in the local (Ohio) business publications and verified that the plant was shutting down for lack of work ( and not moving). One other warehouse automation plant Honeywell owned was also downsizing so no jobs could be transferred there.
    So my guess is that the boom in buying cat toys and salad shooters by mail ( or Amazon) is over. In a few years we will start seeing the vacancy rates in these big warehouses go up.

    • nsa says:

      Hubbert, Care to offer an opinion as to when Hubbert’s peak actually occurred and where we are on Hubbert’s curve now? Any guess as to oil prices going forward? Escalating fuel prices will collapse the show, not mall / industrial park vacancies.

      • Hubberts Curve says:

        We passed the peak in world conventional oil production in 2005 ( Hubberts curve was about production not reserves.) This was fairly close to what was predicted. Hubbert did not foretell the short term effect of financially subsidized low EROI oil resources such as fracked oil or tar sands. We will keep producing oil for many years but it will get more and more expensive to get out of the ground , and the practical volume to extract will go down.
        I think the current rise in oil prices will be the start of a long term trend that will become critical by 2030. High oil prices are here and will only get worse. Many economic activities are already being affected by these rising prices and I see the most vulnerable such as air travel for the. masses to be severely impacted in the next few years.
        I remember picking up a copy of ” Twilight in the Desert” at the bookstore in the Houston airport when it came out in 2005. There was a huge display with hundreds of copies in the center of the bookstore and the traveling oil men were picking them up like pints of beer at Oktoberfest.

        • SoCalBeachDude says:

          Oil should be priced around $20 per barrel and the cost of production in Saudi Arabia is still around $2 per barrel and will likely be well below $40 per barrel in the near future. Let’s just hope it doesn’t go to negative $30 like it did a few years ago as that is quite disruptive to the oil industry.

    • Arnold says:

      Nothing will stop American consumerism.

    • CCCB says:

      The boom in buying by mail or internet is over???? Hahahahaha.

      I guess you’ve never heard about TEMU or SHEIN either.

  16. SoCalBeachDude says:

    MW: 30-year Treasury yield jumps to 4.85%, heading for highest level in 16 years

    • Cameron says:

      The FRB literally has a mandate to ‘stabilize’ the financial system, by which they understand to ‘liquefy’ govt debt (bond) markets and other ‘assets’. That means debt monetization out the Wazoo! 😂

  17. SoCalBeachDude says:

    MW: Bond ‘investors’ feel the heat as popular fixed-income ETF suffers lowest close since 2007

  18. DanS86 says:

    “Which gave rise to the theory around here that banks securitized most of their riskiest and worst CRE loans and sloughed them off years ago to investors that were chasing yield.”

    Were have we heard this one before? Ya Gotta Dance When The Music Is Playing!

  19. Imposter says:

    Wolf mentioned the 3.5% CRE loans that may be coming due in a higher interest rate environment.

    For CRE landlords who are barely”hang in there” with low or no occupancy at 3.5%, are there data on how many and what balances are maturing in the next 12 months or so? Will we see a lot of defaults if renewals aren’t a financiallyrealistic option? Or, isn’t this a real problem for CRE at all?

    • SoCalBeachDude says:

      On average CRE has plunged around 70% in price in the USA over the past 10 years and has a lot further left to fall.

    • cas127 says:

      Trepp periodically does pieces on CRE debt “maturity walls”.

  20. Jason says:

    Based on this demand, I think it is a good idea to convert offices into apartment buildings and malls into logistic centers. This would require a lot of zoning changes though.

    • JeffD says:

      This is far from trivial. You have to completely redo the electrical, plumbing, HVAC, etc.

  21. Xavier Caveat says:

    NYC came down hard on AirBnB, as will other cities.

    Not one short term vacation rental existed in housing bubble number 1, its gonna be a race to the exits with no buyers by owners with scant equity in their pride & joy.

    • ApartmentInvestor says:

      I don’t know if it is the same in other states, but CA cities get a LOT of sales tax $ from retail and they don’t want to lose the sales tax cash flow so it is usually extra hard to get cities to OK conversions from retail to residential.

      I am talking to a lot of STR owners (in CA & CO) who like me are having the slowest fall in a decade and hearing stories of people that just recently got into the business that are looking at not just their interest rates on variable rate loans going up, but the end of their “interest only” (IO) periods.

      • Xavier Caveat says:

        Counties are hot for the transient occupancy tax, but good luck dealing with would-be Hiltons that walk away from properties.

  22. WaterDog says:

    Chop the offices and malls up into 500 sqft apartments. Throw a gym and common areas and it’s perfect for single people.

    You can make them even smaller in big metros. Tokyo has what, 212 sqft apartments?

    • kramartini says:

      I saw a documentary where Japanese businessmen sleep in drawers. Oh wait, that was Seinfeld…

      • cas127 says:

        Plenty of techies in SF/SJ have slept in tiny, tiny subdivided home “capsules”.

        When things got to that level of goofiness (in land-rich America) that should have been a warning sign of irrational unsustainability.

        Worst living conditions + worst rent rates + most easily relocatable jobs…

        It is mind boggling that it went on as long as it did.

    • Steve says:

      I have a solution. The malls will be converted to homeless shelters for the depression. They will be filled with full size cars, old vans and busses all the way up the parking structures. The insides of the vehicles are removed and a bed is built in. I have already built these and the solution is viable. You need a few things: Security to keep order, restrooms/showers like state parks and food. All this the Government can fund and manage. I have been helping homeless for almost 40 years. This is not freebie. It is a tiered work system where the occupant will own his own vehicle after x amount of years doing recycling and other community work. Google is involved. Hopelessness causes homelessness. Inflation causes hopelessness.

  23. techlover14159 says:

    What is the definition of delinquency? 30 days behind payment? Or is it when it ends up with the special servicer which could be three to six months after missing a payment?

    I ask because there may be more forward looking data to figure out where the situation currently sits with Office building owners. I am surprised that this is not further along the path. It is fairly certain how this is going to play out as the rates are not going to come down in any meaningful way until the end of 2024 and new office leases are not really being signed in good enough per sq feet price to cover increased interest.

    Operating expenses have also skyrocketed with contractor pay and rates going up almost >50% since pre pandemic.

    • Wolf Richter says:

      “Delinquency” here is if the 30-day grace period after the first missed payment has expired and the payment still hasn’t been made. Loans come off the delinquency list when the delinquency is cured, or when the mortgage gets modified, or when landlord and lender agree on a deed in lieu, or when the property goes into foreclosure.

      Trepp has a separate report on mortgages that were sent to special servicers.

  24. SoCalBeachDude says:

    MW: Dow down 400 points as Treasury yields ratchet up pressure and jobs data loom

  25. SoCalBeachDude says:

    MW: The Federal Reserve FOMC may have to raise interest rates once more this year, Mester says

  26. SoCalBeachDude says:

    CNBC’s Rick Santelli sees 13% interest rate ahead in the US over the coming years…

    • Wolf Richter says:

      That would be a hoot, wouldn’t it? It would likely mean 12% to 15% CPI inflation. We’d have to go back to the drawing board for a whole bunch of stuff.

      • DawnsEarlyLight says:

        You mean fiscal spending would be under control? Now, that would be a hoot!

    • JimL says:

      Why in the heck would anyone care what CNBC’s Rick Santelli says? I literally care more about what my wife’s cat says about future interest rates.

  27. Percy41 says:

    One segment of this, the fate of the American shopping mall, remains perplexing: why can’t at least some of them thrive and prosper today, as they seem to in, say, Europe? The COVID plague has been at least part of the answer, as are the reality of inadequate parking availability; high gas prices that have reduced mindless driving; inadiquate security within the malls and parking areas; growth of uncontollable large youth groups in malls and their misbehavior without remedial ways of breaking them up and disciplining their members; the need to prevent mall devolution into too many unused rental spaces or lower quality renters; and e-commerce as competition. But surely almost all of those things could be solved with better planning and new financing since the COVID plague seems headed to something people better understand and tolerate now. But the debt that supported the malls of yesteryear reamains, lingering on in unwelcome, throttling form, largely if not entirely thwarting new financing and better use of it to revitalize the better shoppping malls that probably desrve a better fate. Seems a shame.

    • William Leake says:

      It is impossible to deal with roving bands of thugs when they are free to steal $950 of merchandise, in California. Security will be the very big issue with brick and mortar stores. They will start losing customers. I don’t want to shop in stores where so-called “people” are stealing stuff.

      • JimL says:

        “roving bands of thugs”?!?!?

        LOL too funny.

        Tell me your sources of information are taking advantage of you without directly telling me you are being taken advantage of.

        I am guessing that you regularly get information from a source that runs a chryon accross the bottom of the screen talking about the crisis at the border despite the fact that illegal immigration has been much, much worse in the past and will be again in the future.

        Stop being a bedwetter and question your information sources more.

    • elbowwilham says:

      One thing that I noticed about the malls in Europe are they are connected to the transit system, so dual purpose. They also didn’t have sprawling parking lots surrounding them. When I was in Krakow the mall doors were across the street from my hotel. Very easy to walk with my kids to grab some food and walk around. The US is just too car centric. Its very annoying.

  28. cas127 says:


    Strong, useful stuff (as usual).

    Any chance of getting $ figures for outstanding debt in these RE subsectors?

    The delinquency rates are enlightening, but without debt market sizes it is hard to judge the macro implications.

    And if not the off-loading/free-loading banks, somebody must holding this rotting debt.

    I suspect that pension funds might be hip deep.

    And public pension funds’ median funds-to-obligations ratio is only about 73% already…

    How long until we see “sincere” leaps out the windows of Calpers’ single story office buildings…

  29. Not Sure says:

    It would be interesting to know who the average CMBS investor is. When coupled with the bond market bloodbath, I wonder how all this effects pension funds and 401Ks? Sure wouldn’t surprise me if we start hearing more about this as the CMBS market continues its crash (I don’t see anything turning the tide on CMBS anywhere on the horizon).

  30. Seems the only solution is innovation and the hard work needed to deploy it.

Comments are closed.