Office CMBS Delinquency Rate Spikes to 10.4%, Just Below Worst of Financial Crisis Meltdown. Fastest 2-Year Spike Ever

Office-to-residential conversions are growing, but are minuscule because not many towers are suitable for conversion.

By Wolf Richter for WOLF STREET.

The delinquency rate of office mortgages that have been securitized into commercial mortgage-backed securities (CMBS) spiked by a full percentage point in November for the second month in a row, to 10.4%, now just a hair below the worst months during the Financial Crisis meltdown, when office CMBS delinquency rates peaked at 10.7%, according to data by Trepp, which tracks and analyzes CMBS.

Over the past two years, the delinquency rate for office CMBS has spiked by 8.8 percentage points, far faster than even the worst two-year period during the Financial Crisis (+6.3 percentage points in the two years through November 2010).

The office sector of commercial real estate has entered a depression, and despite pronouncements earlier this year by big CRE players that office has hit bottom, we get another wakeup call:

Amid historic vacancy rates in office buildings across the country, more and more landlords have stopped making interest payments on their mortgages because they don’t collect enough in rents to pay interest and other costs, and they can’t refinance maturing loans because the building doesn’t generate enough in rents to cover interest and other costs, and they cannot get out from under it because prices of older office towers collapsed by 50%, 60%, 70%, or more, and with some office towers becoming worthless and the property going for just land value.

Mortgages count as delinquent when the landlord fails to make the interest payment after the 30-day grace period. A mortgage doesn’t count as delinquent if the landlord continues to make the interest payment but fails to pay off the mortgage when it matures, which constitutes a repayment default. If repayment defaults by a borrower who is current on interest were included, the delinquency rate would be higher still.

Loans are pulled off the delinquency list when the interest gets paid, or when the loan is resolved through a foreclosure sale, generally involving big losses for the CMBS holders, or if a deal gets worked out between landlord and the special servicer that represents the CMBS holders, such as the mortgage being restructured or modified and extended. And there has been a lot of extend-and-pretend this year, which has the effect of dragging the problem into 2025 and 2026.

Of the major sectors in CRE, office is in the worst shape with a delinquency rate of 10.4%, far ahead of lodging (6.9%), permanently troubled retail (6.6%), and multifamily (4.2%). Industrial, such as warehouses and fulfillment centers, is still in pristine condition (0.3%) due to the continued boom in ecommerce.

The problem with office CRE isn’t a temporary blip caused by a recession or whatever, but a structural problem – a massive glut of useless older office buildings – that won’t easily go away. The glut is a result of years of overbuilding and industry hype about the “office shortage” that led companies to hog office space as soon as it came on the market in order to grow into it later. But during the pandemic, they realized they don’t need this still unused office space, and they put it on the market for sublease, adding to the glut.

The motto in 2024 was “survive till 2025,” driven by hopes that the Fed would unleash massive rate cuts and drive rates to the bottom.

A lot of CRE loans are floating-rate loans whose interest rates adjust with short-term rates, such as x percentage points over SOFR. And pushing interest rates back down to rock bottom might give some of these properties a chance.

The Fed has cut interest rates, but its five short-term policy rates are still between 4.5% and 4.75%, and SOFR was at 4.57% on Friday, amid lots of talk from the Fed about slowing the cuts and stopping them earlier than expected, while long-term rates have risen since the first rate cut on renewed inflation fears.

But whatever rate cuts the Fed will eventually get done cannot address the structural issues that office CRE faces. Owners of nearly empty older office towers won’t be able to make the interest payments even at lower interest rates.

The current “flight to quality” is making the fate of older office towers even worse. High vacancy rates in the latest and greatest buildings allow companies to move from an old office tower to the latest and greatest tower, some downsizing in the process, and they’re doing it, thereby speeding up the demise of the older tower.



Conversions of old office towers to residential are taking place, and the numbers are growing but minuscule because many office towers cannot be converted for a variety of reasons, including their large square floorplates and the costs of conversion to where it would be cheaper to tear them down and start from scratch with a modern building.

In 2019, across the US, 56 office buildings were converted into residential, based on their dates of completion, according to data from CBRE, cited by the WSJ. That pace continued in 2020 and 2021. By 2023, the pace ticked up to 63 conversions. And in 2024, 73 conversions were completed and 30 conversions are under way. In 2025, 94 conversions are expected to get completed with another 185 planned, for a total of 279 conversions.

There are now 71 million square feet of conversions planned or under way. But that’s a drop in the bucket. That would account for just 7.9% of the 902 million square feet of vacant office space in the US, according to estimates by Moody’s.

Thankfully for the US banking system, a big part of office mortgages has been broadly spread across investors around the world and across foreign banks, not just US banks. For years, there was this assumption that you cannot lose money in real estate, especially office CRE in prime US markets, and investors around the globe piled into it.

Office mortgages are held by CMBS and CLO investors, such as bond funds, by insurers, by private or publicly traded office REITs and mortgage REITS, by PE firms, by private credit firms, and other investment vehicles, and by foreign banks. Those mortgages pose no threat to the US banking system.

US banks have some exposure to office mortgages, and there have been some big write-offs already, and lots of extend-and-pretend under the motto “survive till 2025.” Some smaller US banks have concentrations of office mortgages on their books, and so they have to deal with them, take the losses, crush their shareholders, etc., and some might eventually choke to death on their office mortgages. But none have so far.

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  83 comments for “Office CMBS Delinquency Rate Spikes to 10.4%, Just Below Worst of Financial Crisis Meltdown. Fastest 2-Year Spike Ever

  1. DoNot says:

    I’m telling y’all Amazon is loaded with CMBS hence the RTO mandate. Also eliminates a fraction of the workforce that’s just gravy..

    • Wolf Richter says:

      Amazon is loaded with office space, including buildings that it owns. It’s not loaded with CMBS, which are securities that investors are loaded with.

  2. SoCalBeachDude says:

    Just bulldoze the office towers that are neither needed or wanted.

    • Seba says:

      Maybe they’ll get cheap enough to do controlled demos and some fireworks, maybe a band playing or something as an attraction. I’d pay a few bucks to watch that

      • joedidee says:

        that’ll sure drive property taxes to masses higher
        cities love it when old buildings get bulldozed and new ones come out of ground
        sky high taxes to follow
        simple starbucks on corner(maybe 2,000sf)
        $1.5+ to build then nice $25k in property taxes

        • Home toad says:

          Trump will nominate Home toad as the empty building Tzar, I will implement operation “mother chicken” on day one. To keep prices of eggs down we will house, feed and manage the egg laying processes of the chickens from these unused buildings.
          Down in the lobby is where you can purchase your el cheapo eggs.

          And as “skull crusher” joedidee mentioned above you can get some coffee.

    • Nick Kelly says:

      Office towers are not malls. They are surrounded by very close, tall neighbouring properties and can’t be bulldozed or demolished with explosives. One study done on a tower concluded it would have to be taken apart floor by floor.
      Because of inflation during its several decades of life, it would cost more to demolish than it did to build.

  3. Swamp Creature says:

    Don’t expect any relief any time soon from the office glut. Just wait till Musk and Vivek get hold of the bloated Federal Budget and start imposing a meat ax approach across the board. For example, the IRS only has 7% of their employees working in their offices. The rest are working from home. Most of these federal buildings will be closed up. Same with the commercial buildings that suck off the Federal leviathan. We could see a depression here in the Swamp in the very near future.

    • MM1 says:

      But didn’t Musk make all Tesla worker RTO?

      • William McDonald says:

        The same Tesla that has dramatically underperformed the sp500 and nasdaq especially since he started making his drug-fueled business decisions like rto during a pandemic? I’m sure he’ll propose similarly stupid stuff for the IRS and drive the best staff away from one of the most efficient government agencies.

        • Brad says:

          So efficient they recently added 50k additional workers??? Huh?

        • Anonymous says:

          Not sure what ticker you’re looking at McDonalds but TSLA has mooned in my portfolio recently.

          Also the IRS is efficient? LOL

        • Wolf Richter says:

          “recently.”

          TSLA is down 17% from its ATH two year ago almost exactly.

        • Scott says:

          Hmm. Quick note: Your most efficient government agency employees will soon be replaced by xAI. Then we don’t care where they work…

        • Icebox says:

          Regarding TSLA – Isn’t it just a little absurd that on a day like today, when TSLA goes up 3.46%, its Market Cap increases by 37 billion dollars? The total market cap of Ford is 44 billion. Ford had a total sales/revenue of 176 billion last year. TSLA had a total sales/revenue of 96 billion. How is TSLA with a market cap (1.1 trillion) of over 20 times that of Ford not a bubble?

        • William McDonald says:

          @icebox

          They aren’t a car company. They are Skynet with the Terminators (Optimus bots) enabled by xAI and Skynet. Once they wipe out us meddling earth meatbags nagging them to actually deliver self-driving a decade late, they are moving on to Mars.

        • 1234 says:

          So Musk wants over half of Tesla 2023 revenue and over 3 times net income for salary, is that right? I don’t understand how the company can pay its expenses then.

    • Jim Hannley says:

      7%? That is a surprising figure. Can you link to your source?

      • Bobber says:

        No, he can’t. Wolf should delete it.

        The IRS Commissioner said the WFH share was 50% at a February House Committee hearing. The IRS struggles to attract employees and has to offer remote in this environment. In addition, they are still adjusting remote work down from COVID, when everything was remote. In addition, auditors are rarely in the office because their job is to be on location. In addition, phone support personnel work from home these days, consistent with private industry.

        So, let me take all surprise out of it with one statement. People who think it’s OK to cheat on taxes often bash the IRS.

        • William McDonald says:

          Yep. 2022 was the lowest cost to collect in history. Part of that is a simpler tax code, better tech, and strong revenue from a strong economy, but overall the IRS is a good investment if you care about the deficit/debt as growing revenue is half the equation.

        • ShortTLT says:

          Bobber,

          People don’t think it’s cheating to avoid paying taxes. They think it’s just another way to play the game.

          At my day job, customers in Massachusetts often brag about how they drive over to New Hampshire to “avoid the sales tax” on a purchase. They say it in such a proud way, as if it’s a ‘life hack’ that no one else knows about. I don’t think it ever occurs to them that they’re admitting to tax evasion.

        • AndyfromLV says:

          Yeah I audit casinos for the State of Nevada and everybody scans all their workpapers and they send them to us electronically. I’m sure its similar for the IRS. All we’re doing is tying numbers and footing totals. Sometimes I sit at my desk or at the audit site and I won’t say a word to anyone for hours. Just sit there with headphones on.

          It’s definitely work that can be done at home. In fact, it may be one of the few professions that is more efficient WFH. No coworkers disturbing you.

        • Swamp Creature says:

          When my parents moved to Florida in the 1970’s they paid NY State income taxes for the period when they lived in NY that year. They told this to their friends in their clubhouse how honest they were. The whole crowd erupted in laughter, and called my dad a sucker. They bragged that when they got the NY tax bill for part time residence in the state they ripped it up into a thousand pieces. Another dude said he used it for toilet paper.

    • Nick Kelly says:

      Does it cross anyone’s mind, anyone, anyone, that Musk’s job is supposed to be running several major businesses.? So will running the govt be his night job, or will be running outfits like Tesla be his side gig?

      If it’s the latter, shareholders of Tesla may have issues, because so does Tesla.

      • robert says:

        His job is managing the managers, not doing their work.
        It hasn’t been a problem so far, and he seems to still have free time.

  4. Michael Engel says:

    A landlord with a large vacancy rate might settle with his banks. He will pay close to zero interest rate, long terms and monthly payments that
    he can afford to pay his mortgage loan until the loan is paid in full. The bank will lose some profit on interest, but not its assets.

    • Wolf Richter says:

      Most of these CRE loans are interest-only. What extend-and-pretend (as mentioned in the article) means is that banks will restructure the mortgage, such as extend the mortgage past the maturity date (so there is no repayment default), and make concessions on the interest rate to get to lower payments that the borrower can meet, and pretend that the mortgage is still good. But eventually, they will have to deal with reality; regulators are not fond of extend-and-pretend dragging out. The collateral values have plunged by 50% to 70%, so there is no good exit of the extend-and-pretend here.

      • John says:

        What regulators? They gone next.

      • joedidee says:

        and banks have set aside so much already for these coming losses

        • Wolf Richter says:

          ALL office mortgages combined held by all investors and by all banks globally total $750 billion, or 16.7% of total CRE mortgages. US banks hold only a small portion of that $750 billion. Investors hold the majority.

          There are over 4,000 US banks with $23 trillion in total assets.

          Even regional and smaller banks, which are proportionately more exposed to office mortgages, have only 3% of their assets tied up in office mortgages.

          Banks securitized most of their office loans (CMBS, CLOs) or sold the mortgages outright to mortgage REITs and others. Seems over the years, they securitized and sold their riskiest junk, which is why you see the story here.

          Office is just not that big. Banks are more exposed to multifamily mortgages, which is a far bigger category (over $2 trillion, but the government guarantees 55% of it).

          So far, banks have taken some losses on office mortgages, and their stocks got hit, and that’s how it should be. A few smaller banks might collapse because of office mortgages, but none have so far.

      • GuessWhat says:

        IMHO, unless this morass finds its way into creating a notable uptick in unemployment somehow, I don’t foresee it growing into something the Fed can’t handle the usual lender of last resort.

        We’re basically at the exact same level of delinquency as the GR and it still remains mostly a big nothingburger. If most of these loans are interest only, I don’t see how lenders won’t just keep kicking the can down the road. And this seems like it may be a very long road.

        • ChrisFromGA says:

          Extend and pretend only works if there is a recovery. When that office building worth $1M and with a $100M mortgage gets sold in 2029 for land value, minus demo costs, somebody is going to take a yuuge hit.

  5. Lenel says:

    Great content and timing of content as always! Not covered sufficiently in mainstream media.

  6. MM1 says:

    So when the value of the CMBS start plummeting whose balance sheet is that showing up on? Are these assets insured with derivatives against them? When you mention insurers and pension as investors – are we talking about like 5% of their assets or 20%+ of their assets?

    • Waiono says:

      Rest assured the wall st. grifters and commercial developers will incur no personal financial loss. They may have to make do with a a few extra rounds of golf each month in their spare time.

      Can you say “golden parachute”?

      • Wolf Richter says:

        There was an old saying in the oil patch, told to me when I was still in Oklahoma decades ago: “Never drill with your money.” RE development may be similar.

        But these people here are not RE developers, they’re landlords and investors — and they or their companies are taking losses when they walk away from a property… they lose their equity in the property.

        • Waiono says:

          In the 08 collapse I had a client that was maybe the biggest developer in OC. Every property was non-recourse, separate LLC. The same banks he stiffed in 08.09 sold his developments back to him 3 years after he walked….for 10 cents on the dollar. They knew he could perform and they knew he was sitting on piles of cash to make those defaulted developments rise from the ashes…and he did just that.

          There are no morals in that game…only maximization of profit.

        • WB says:

          I once asked an investment officer why his bank did not make non-recourse construction loans. His answer was, “If the developer doesn’t believe in his project, why should I?”

        • Jeff Corey says:

          We need another WE WORK where this time everyone walks away like New Man
          Sorry to say that everyone here has it right that the expense to change these buildings over to housing is high while the demand for Downtown living is probably not what it had been before; due to cutbacks of office work. General Motors is moving out of Detroit Renaissance Building to another just finished Downtown building. Another massive empty space. Someone loses out.

        • Anthony A. says:

          Jeff, Detroit is good at tearing down old buildings! No biggie! The manufacturing plant I worked at near 5th and Summit in Detroit in the 1970’s is now an empty (Big) lot! Actually, that whole area is now vacant ground.

          The Renaissance Building will be gone like that soon enough! Heck, if GM continues losing market share like it has over the last 50 years, it may be gone too!

        • Swamp Creature says:

          Detroit should tear down all these old useless buildings and replace them with parks and green space.

        • Wolf Richter says:

          Swamp Creature

          Downtown Detroit has been revitalized years ago. Lots of cool stuff going, big tech scene too. They even completely restored the huge once-abandoned train depot, Michigan Central. Just opened a little while ago. Beautiful. With a park around it. Here’s a picture of its outside:

          https://michigancentral.com/wp-content/uploads/2024/05/2023-Ted-Talk-Setup-1.png

          And inside, before and after:
          https://www.reddit.com/r/Detroit/comments/1dqklcd/michigan_central_station_renovation_before_and/?rdt=54897

    • Wolf Richter says:

      1. Insurers hold a wide range of yield-producing assets, from Treasury securities and all kinds of other bonds, to buildings, mortgages, and CMBS. They’re hugely diversified. They generally hold securities to maturity, though they might occasionally sell something for some reason.

      2. CMBS are structured securities, with the lowest-rated highest-yielding tranches taking the first loss, and after the lower-rated tranches got wiped out, the higher-rated tranches are taking the next loss. The highest rated CMBS tranches have started to take small losses. Insurers generally go for the low-risk highest rated tranches. Risk seekers such as junk bond funds, PE firms, hedge funds, and others buy the lowest rated stuff.

  7. Glen says:

    Does this have any knock on effects? I assume losses can be offset against gains for those in that position. Seems like cities could see increasing consequences beyond what already exists for property taxes and businesses in those areas. My city has a lot of these but none are of significant size and so the number of tear downs with replacements of fairly pricey studio, one and two bedroom happens quickly. We had RTO come back for most state agencies for 2 days a week simply to try to save downtown businesses. But hotelling cubicles a lot more space efficient than dedicated offices.

    • Grey Shepherd says:

      Most of the permanent financing I’ve dealt with on the commercial side is fixed rate based on a spread over the 10 year Treasury. 10 year term, amortized over 25 or 30 years resulting in a balloon payment at the end of the term.

      10 years ago, the 10 year was in the 2.0% range. Today they are North of 4%. If your loan is maturing on an office building you financed 10 years ago and now you have to come up with a big equity check to pay down the loan balance enough to meet the LTV and DSCR for a new loan just so you can continue to bleed cash flow, the rational choice might be to walk away if it is a non-recourse loan.

  8. Kuyperian says:

    Do you see any contagion risk as a result of this problem in CMBS?

    • Wolf Richter says:

      No, because banks don’t generally hold office CMBS. They’re held by investors around the globe, and no one cares about them.

      • Jim Hannley says:

        I seem to remember seeing an article in 2011 the Atlanta Fed admonishing SE region banks for portfolio over exposure to commercial real estate. It had to deal with several mid-sized bank failures and cited this as proximate cause.
        At the time I was lobbying the Arizona House to establish a public state bank. I cited the article and pointed out that according to the latest FDIC quarterly report, Arizona banks’ largest asset class was CRE, followed by multi-family residential. A review of the 2023-24 quarterlies is in order. Is there an aggregated statistic on CRE capacity utilization?

      • Kuyperian says:

        How are you arriving at these numbers that assure you that banks are not overly exposed to delinquent CRE debt?

        The numbers I am seeing say that CRE accounts for 21.6% of the loan portfolio, on average, for U.S. banks. And that U.S. banks have, on average, $1.40 in reserves for every $1 in delinquent CRE loans, which is only about half of the amount they should have.

        At the six largest U.S. banks, the amount of delinquent CRE loans exceeds their amount of reserves.

        That data comes from FDIC filings and were reported in the Financial Times.

        A further report by the National Bureau of Economic Research says that if just 20% of CRE loans default, it will lead to nearly 500 banks with a combined asset value of $1.4 trillion becoming insolvent.

        And a paper published by the Fed indicated that 14% of all loans, and 44% of all office loans currently are experiencing negative equity.

        Finally, a chart by the St. Louis Fed indicates that U.S. banks currently have $3 trillion in CRE loans on their balance sheets.

        This does not sound like all of the risk is spread out thinly to investors around the world, and that U.S. banks have little exposure to a meltdown in the CRE market.

        • Wolf Richter says:

          I already linked one of the many articles here (just above your comment) which links one of the sources, and you were just afraid to click on it because it would blow your theories out of the water. So I’ll do it again one last time, and then adios, dude, because it’s a waste of time for me to repeat over and over again what people don’t want to know, and refuse to read, because you people refuse to read anything that contradicts your banking-system-is-going-to-collapse propaganda.

          Total CRE mortgages = $4.5 trillion on income producing properties (not including $470 billion in construction loans and $630 billion in owner-occupied property loans that the FDIC classifies as “commercial mortgages” but that don’t produce income because the owners live in them, not tenants).

          First of all, you people (including the stupid FT reporter?) don’t understand that not all of CRE is in trouble, only part of it. Industrial, Life Sciences, and others are in pristine condition. And over half of multifamily (the largest segment accounting for 44% of total CRE mortgages) is guaranteed by the government.

          By category:

          Multifamily: 44.2%
          Office: 16.7%, or $750 billion
          Retail: 9.4%
          Industrial (warehouses, etc.): 8.0%
          Lodging: 6.7%
          Healthcare (life sciences): 2.1%
          Other: 12.9%

          Banks (in the US and overseas) held $1.73 trillion (38.4%) of the $4.5 trillion CRE mortgages. Investors and government entities held or guaranteed the remaining 61.6%. Government guarantees $1 trillion of multifamily mortgages.

          Including construction loans, banks hold 45% ($2.25 trillion) of all CRE mortgages:

          1. Top 25 banks held $700 billion (14%) of CRE debt, about 4% of their total assets
          2. Next 110 banks (assets $10 billion to $160 billion) held $800 billion (16%) of CRE debt.
          3. The 4,000 smaller banks held $750 billion (15%) of total CRE debt.

          Top 25 banks: office mortgages are less than 1% of their total assets.

          4,110 regional and smaller banks: office mortgages account for 3% of their total assets.

          There regional and smaller banks’ total CRE mortgages (including industrial, life sciences, a lot of multifamily, etc. which are in pristine condition) amount to 20% of their total assets.

          A few small banks are hugely exposed to CRE, with CRE mortgages exceeding 50% of their assets, and if they run into CRE trouble, they could fail. But even they will likely not be taken down by office mortgages, if they have even any, but by their other CRE mortgages, such as retail and lodging and multifamily, which they typically lend on most.

          The FDIC maintains a “Problem Banks List” by number of banks (66 small banks currently) and by their total assets ($83 billion currently). So on average, each of these problem banks has $1.2 billion in assets, tiny banks. See chart below.

          Note that the four banks that failed in 2023 (my red add-on) didn’t fail because of CRE exposure, but because of bank runs triggered by fears about their unrealized losses on long-term Treasury securities and government-guaranteed MBS, with zero credit risk, but lots of interest rate risk (click on the chart to enlarge):

          So office CRE mortgages on the banks books are too small to cause serious trouble to the banking system, though they could cause a few heavily exposed small banks to topple. I’ve said that for two years, and that hasn’t changed and we’re still waiting for the first smaller bank to topple because of office CRE.

          For a small bank with $1 billion in assets, CRE exposure of 20% means that the bank would sit on $200 million in CRE loans, all kinds of CRE loans, including those in pristine condition. On average, this bank would also be exposed to office mortgages amounting to 3% of its assets, or about $30 million, and if it books a total loss on its $30 million in office loans, it would hurt its earnings and shares, but so what.

          The largest banks, as I said above, have less than 1% of the total assets in CRE. It’s minuscule.

          Banks are still incredibly profitable. In 2023, JPM had nearly $50 billion in net income, including losses in CRE. So what if it loses an additional $50 billion on top of it on its CRE mortgages, it would just wipe out one year of net income, it wouldn’t even have a loss, it would just break even. And it wouldn’t even affect its capital, which would remain unchanged since income from its other activities would be enough to pay for the losses in that year. And if CRE losses exceed income from other sources by a lot, year after year, it would still take a long time before their capital would be wiped out. Get a grip, dude.

  9. Cole says:

    So, some investors are going to lose some money here as the “owner” walks away and hands the worthless building over to the investors that really own it. I shed a tear for them….. Not! Many of them probably already made their money back in interest payments when things were good.

  10. WB says:

    LOL! I hear modern bankers tell me not to worry because the buildings are still good collateral. I laugh and ask them what is the value of collateral that nobody wants? The bankers of yesterday were smart enough not to gamble. They paid us 3% on our savings, did their due diligence and charged us 6% on a loan and were usually on the golf course by 3 PM and drunk by 5 PM.

    All the regulations and laws that were put in place following the great depression and crash of the 1930’s have been removed, and the money changers are once again unrestricted. The financial centers around the world have bought all the local governments.

    Interesting times.

  11. Max Power says:

    Despite what you might hear from Real Estate ‘professionals’, the situation with the office market will only continue to get worse.

    Also, despite the noise and hoopla over RTO mandates, there are outfits out there that measure actual in-office attendance and the stats show that the average nationwide weekly in-person office presence currently sits at around 54% of the prepandemic rate. While it is figure is rising, it is doing so very slowly, 2-4% per year, depending on whose stats you use (and part of the rise is probably just the natural increase in the number of workers). The actual presence rate fluctuates based on the day of the week because there’s a lot of hybrid work arrangements out there, with Tuesday typically being the day with the highest presence rate.

    The reason the the crisis in the office market is such a slow-moving train wreck is due to the fact that commercial leases are a very long term affair, typically 5-10 years and as such it takes time for existing office leases to work their way through the lease renewal python. This situation also gives time for landlords and lenders work out mutual accommodations.

    However, at the same time, the slow-moving nature of this crisis and the RTO “pronouncements” (which the stats on the ground show aren’t actually making much of a difference as far as the actual in-office presence rate) gives some folks false hope this is a non issue – but it’s not – as evident by Wolf’s graph showing a clear, unbroken upwards trend in delinquency rates. So, more to come on this.

    • Shiloh1 says:

      One of the insurance entities with its name on one of the 100 story buildings in Chicago has its naming rights tied to actual % occupancy in their lease with the building owner going back about 15 years. If they fall short, then bailout airlines will be the new name on the building. Key card early and often – The Chicago Way.

      • Sailorgirl says:

        I was in Chicago a few weekends ago and was impressed how clean and livable the city was inside the loop. A lot of buildings had been converted to housing. The balance of old and new was brought out by the Architectural boat tour. (Spectacular at night). I googled CMBS inside the loop and came up with 1.4 Bin delinquencies 23% of total second behind NY. Further reading mentioned that only 7% of mortgages were backed by CMBS. So not as bad as it seems. Headlines can be deceiving.

  12. Imposter says:

    Seems like the longer that work from home persists, the deeper the infection of vacancies goes. Older buildings, being on the bottom rungs of that ladder get the worst of it and it creeps upward from there.

    Isn’t conversion to residential an awfully expensive affair? Dividing up large spaces into residences with bathrooms and kitchens in each new space seems like a lot of expensive work on an existing structure. Especially if the building owner is already strapped for cash from high vacancies.

    • Home toad says:

      I think that “church from home” is also a good idea. Relax…. glass of wine.
      We could tear down all the churches. There are over 350 thousand churches in the US. Or work from church is an idea.
      People feel obligated to go to church, no so much to go into the office….

  13. Lindso says:

    Beside CRE investors I imagine there will be added pain felt by residential property owners due to shrinking tax base at a time when infrastructure renewal costs are skyrocketing. In my area we see double digit property tax increases with no end in sight.

  14. Reply says:

    In the early 1990s there was a notable period of distress. Berlin Wall falling, Defense budgets slashed, economies like Los Angeles getting devastated.

    A frequent saying in those days was Stayin’ alive until ’95. We had a few years. Now with inflation, or something, we have to stay alive until ’25.

  15. Rico says:

    Reminds me of AIG and Lehman Brothers.
    Looking at the charts can’t I believe the sht isn’t about to hit the fan.
    It may be only an “Investor” problem but it can collapse like a domino snake.

  16. Ethan in NoVA says:

    I am kind of an odd dude but I would love to live in a commercial space. 3 phase power, ability to fly 1000lb led video walls and large space to author laser shows. Be loud without neighbors complaining. Run CNC and laser cutters in some kind of capacity to make side hustle money.

    A friend is trying to buy an older municipal office building to run a vintage computer museum. While it’s a bit wonky to me, his efforts will bring a lot of cool stuff and smart people to that suburb if he succeeds.

    Let people do cool stuff with that dead space, make the town interesting.

    • ShortTLT says:

      That sounds like some of the AV art spaces I’ve been in – one of which included a flown PA & video wall.

  17. Nathan Kurz says:

    *Office mortgages are held by CMBS and CLO investors*

    Nice article, but are you sure that CLO investors are holding office mortgages? Typically, CLO’s are “senior secured loans”: shorter term, full recourse. Or at least, this is what I usually see being claimed:

    If CLO’s are actually holding non-recourse office mortgages, I think this would be a surprise to a lot of CLO investors. But you definitely have more knowledge than I do. Could you confirm your statement?

    • Wolf Richter says:

      1. Yes, lots of office buildings have two funding components, a mortgage and a second-lien note, and it’s that second-lien note that can be securitized into CLOs. We have discussed a few of those deals here.

      2. Nonrecourse doesn’t mean unsecured. They’re still secured by the property. Many CRE loans, including second-lien notes are nonrecourse just fine, secured by the property and nothing else. And those that are recourse, they’re in an LLC that doesn’t have anything but the property in it, exactly like other recourse CRE mortgages; so effectively, they’re also only secured by the property.

      • ShortTLT says:

        How are these mortgages senior loans? Do the LLCs have other liabilities?

        • Wolf Richter says:

          The mortgage and other liabilities associated with the building, such as accrued payroll, accrued account’s payables, etc. The LLC is the owner of the property. But it owns only one property. Each property is in a separate LLC. Some company then owns those LLCs.

  18. kramartini says:

    It looks like this time around CMBS worked as advertised by channeling risk of loss away from banks and towards other players that can absorb losses without taking down the economy.

  19. SoCalBeachDude says:

    MW: Intel ousts CEO Gelsinger with stock down 61% during his tenure

  20. Mark Hoffman says:

    I predicted the work-from-home trend way back in 2009 in a paper I wrote for Microsoft. I’m no genius, but even I could see it coming after I saw an early version of what became Microsoft LiveMeeting, then Skype for Business, and then Teams. Here’s what I wrote in the opening paragraph:

    A confluence of irreversible trends will make telecommuting increasingly
    popular over the next two decades. By 2030, almost all white-collar workers worldwide will telecommute from home or from telework centers at least one day a week, and many will telework exclusively.

    Anyone in tech with eyes and a working brain could see this trend coming back in the oughts. If we could see this trend coming 15 years ago, why couldn’t those supposed geniuses in CMBS see it? Are they total morons or just partial morons?

  21. Abre bubush says:

    I would guess that the bulk of underutilized CRE is in suburban office parks, which would have negligible chance of attracting residential renters/buyers.

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