According to the Mortgage Bankers Association’s (MBA) latest commercial real estate finance (CREF) Loan Performance Survey, delinquency rates overall for mortgages backed by commercial properties were unchanged during the first quarter of 2024, but loans backed by office properties continued to see a rise in delinquencies.
“While overall delinquencies remained flat, the delinquency rate for loans backed by office properties rose again during the first three months of this year,” said Jamie Woodwell, MBA’s Head of Commercial Real Estate Research. “Loans across property types are adjusting to higher interest rates and uncertainty about property values, but the continued fog around the impact of hybrid work adds another challenge for office properties and their loans.”
The balance of commercial mortgages that are not current was unchanged in Q1 2024 compared to Q4 of 2023.
Post-pandemic office blues
According to CoStar, a platform for commercial real estate information, analytics, and news, post-pandemic hybrid and remote work patterns have combined with corporate cost-cutting and higher interest rates to reduce the demand for office space. CoStar also found that new U.S. office leasing volume totaled less than 100 million square feet in Q4 2023, mirroring levels from the early years of the pandemic.
In reporting Q1 2024 financial results, Bank of America Chief Financial Officer Alastair Borthwick noted: “Commercial net charge-offs increased $191 million versus the fourth quarter, driven by commercial real estate losses in office exposures. And on office losses this quarter, we recorded charge-offs on 16 office loans, four were a result of sales activity (i.e., final resolution); were from losses that we expect on exposures that are in the process of expected resolution in the course of the next 90 days; and the rest we took as a result of refreshed valuations.”
Also reporting losses in the office market was PNC in its Q1 2024 earnings call. While delivering solid Q1 results generating net income of $1.3 billion, PNC reported its office loan portfolio dipping 3% to $7.8 billion in Q1 2024, compared to Q4 of 2023. Of PNC’s total commercial real estate loan portfolio, office comprises nearly 22% of PNC’s total commercial real estate book.
“The commercial real estate market is large and diverse, with a wide mix of property types, geographic markets and submarkets, property and loan sizes, owners, lenders, vintages, and other characteristics,” added Woodwell. “With 20% of the $4.7 trillion of outstanding commercial mortgage debt maturing this year, each of those factors will play a part in determining which loans may face challenges and which may not.”
Key Q1 commercial real estate highlights
- 96.8% of outstanding loan balances were current or less than 30 days late at the end of Q1, unchanged from Q4 of 2023.
- 2.5% were 90-plus days delinquent or in REO, up from 2.3% the previous quarter.
- 0.3% were 60-90 days delinquent, unchanged from the previous quarter.
- 0.4% were 30-60 days delinquent, down from 0.6%.
- Loans backed by office properties drove the increase.
- 6.8% of the balance of office property loan balances were 30 days or more days delinquent, up from 6.5% at the end of Q4 2023.
- 6.3% of the balance of lodging loans were delinquent, up from 6.1%.
- 4.7% of retail balances were delinquent, down from 5.0% the previous quarter.
- 1.2% of multifamily balances were delinquent, unchanged from the previous quarter.
- 1.2% of the balance of industrial property loans were delinquent, up from 0.9%.
- Among capital sources, CMBS loan delinquency rates saw the highest levels.
- 5.2% of CMBS loan balances were 30 days or more delinquent, up from 5.1% last quarter.
- Non-current rates for other capital sources remained more moderate.
- 0.8% of FHA multifamily and health care loan balances were 30 days or more delinquent, down from 0.9%.
- 1.2% of life company loan balances were delinquent, up from 0.9%.
- 0.4% of GSE loan balances were delinquent, down from 0.5%.
MBA’s CREF Loan Performance survey collected information on commercial and multifamily mortgage portfolios as of March 31, 2024. This quarter’s results build on similar surveys conducted since April 2020. Participants reported on $2.7 trillion of loans in March 2023, representing 57% of the total $4.7 trillion in commercial and multifamily mortgage debt outstanding (MDO).
