Commercial real estate (CRE) loans on office and multifamily properties got further bludgeoned in October.
By Wolf Richter for WOLF STREET.
The delinquency rate of office mortgages that have been securitized into commercial mortgage-backed securities (CMBS) spiked to 11.8% in October, the worst ever, and over a percentage point higher than at the peak of the Financial Crisis meltdown, according to data by Trepp , which tracks and analyzes CMBS.
CMBS are bonds that are sold to institutional investors around the world, such as bond funds, insurers, pension funds, REITs, etc. Banks that originated these mortgages are off the hook here, and investors eat the losses (see my discussion “Who is on the hook for CRE mortgages?” in the comments just below the article).
They were good until they suddenly weren’t. In October 2022, the office CMBS delinquency rate was still 1.8%. In the three years since then, it exploded by 10 percentage points.
Older office towers are getting crushed by a flight to quality and by corporate downsizing of office space due to continued working from home, as the much ballyhooed RTO has stalled. Even newer office towers are getting crushed by corporate downsizing and consolidation of their office footprints.
For multifamily CMBS, the delinquency rate rose to 7.1%, the worst since December 2015. Multifamily CMBS are backed by rental apartment property mortgages.
December 2015 was just before the defaulted $3-billion loan on Stuyvesant Town–Peter Cooper Village in Manhattan was “cured” through the sale of the property to Blackstone, which caused the loan to be removed from the delinquent list, and the CMBS delinquency rate plunged.
Newly delinquent office loans…
Loans become delinquent and are added to the delinquent balance when the borrower fails to make a loan payment or when the borrower fails to pay off the loan on maturity date (maturity default).
The $304 million mortgage on Bravern Office Commons in Bellevue, WA, was added to the delinquent balance in October, according to Trepp. The 750,000-square-foot complex of two towers, completed in 2010, is now vacant, but was once fully leased by Microsoft, which announced in 2023 that it would not renew the lease and has since then departed.
The property was purchased in 2020 by Invesco and Australian Retirement Trust from Principal Financial Group for about $585 million, according to Downtown Bellevue Network. In early 2020, it was appraised at $605 million. Two months ago, Morningstar valued the property at $268 million, a 56% haircut from the appraisal in 2020, and 12% below loan value.
The $300 million mortgage on The Factory in Long Island City, NY, was added to the delinquent list. The loan on the 1.1-million-square-foot office property was originated in 2020 at the very low interest rates at the time. The borrowers exercised three extensions that had pushed the maturity of the loan to October, when the loan finally went into maturity default. Occupancy dropped to 73% by the second quarter.
The property was built in 1926 as furniture warehouse for Macy’s. Atlas Capital, Invesco, and Square Mile Capital Management purchased it in 2012 at a bankruptcy sale and invested $100 million to redevelop the property into creative office space with Class A amenities. In 2018, Partners Group purchased a stake in the property that valued it at $400 million, according to The Real Deal, which added:
“While Manhattan’s trophy towers have led a recent wave of leasing activity, outer-borough landlords have struggled to land tenants. Long Island City’s availability rate hovered just below 27% in the first half of 2025, according to CBRE, compared to Manhattan’s overall availability rate of 17.5%.”
“Cured” loans…
Loans are considered “cured” and get pulled off the delinquency list when the interest gets paid; or when a deal is worked out to extend and modify a mortgage that wasn’t paid off at maturity date; or when a forbearance deal was worked out between borrower and lender; or when the loan is resolved through a foreclosure sale; or when the property is returned to the lender in lieu of foreclosure. So this process of “curing” a delinquent mortgage can mean pushing the problem into the future or taking big losses now.
For example, cured through “Extend and pretend” was the $96 million office loan backed by the 378,000-square-foot HP Plaza in Springwoods Village, a mixed-use development in Spring, in the Houston metropolitan area. The corporate campus of two buildings, completed in 2018, is 100% leased to HP Inc. through 2033. So this is a newer building, not some 1980s tower, and it’s fully leased, and not mostly vacant.
The loan became delinquent in the spring due to maturity default, when the balloon was not paid off by the maturity date. The borrower, Northridge Capital, which had acquired the property in 2019, has now negotiated a second maturity extension to November, following an additional principal curtailment, and so the loan became current through extend and pretend. “Discussions around refinancing are ongoing, with life insurance capital sources in play,” Trepp reported.
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Who is on the hook for CRE mortgages?
For office mortgages: A big part is spread across investors – not banks – around the world via office CMBS – discussed above – and CLOs that are held by bond funds, insurers, private or publicly traded office REITs and mortgage REITS. PE firms, private credit firms, and other investment vehicles, are also exposed to office CRE loans.
Banks hold only a portion of office CRE loans. Many banks disclosed write-downs and losses. Many have sold bad office loans to investors at big discounts to get them off their books. And their earnings and shares were dented. And some of these banks were big foreign banks that were aggressively pursuing the US office market in prior years, such as Deutsche Bank.
For multifamily mortgages? The largest category of CRE debt, with $2.2 trillion in mortgages outstanding at the end of 2024, accounts for 45% of the $4.8 trillion in total CRE debt, according to the Mortgage Bankers Association.
Over half of multifamily debt was securitized by the US government (mostly Fannie Mae and Freddie Mac which doubled their exposure over the past 10 years) and the CMBS were sold to investors; and state and local governments hold a small portion of it.
Banks and thrifts are on the hook for 29% of multifamily debt, life insurers for 12%, and private label CMBS – discussed above – CDOs, and other Asset Backed Securities for about 3%.
The relatively limited exposure by US banks to CRE mortgages indicates that CRE is not going to pose a systemic risk for the banking sector, that most of the losses hit investors and the government, and that the Fed can let it reset on its own.
I was walking around a Simons Property Mall in Clarksburg, MD the other day. All the stores were devoid of customers. The mall looked like it was in a death spiral. I wonder who owns the debt on this mall? There was nothing in there I would want to spend one cent on. The only few people in there looked like they couldn’t afford a cheap hot dog.