Fitch Doesn’t See Bottom of Office CRE Mess, Sees CMBS Delinquency Rates Spike Way Past Financial Crisis Peak in 2025
A big driver is the “secular decline in the office market” that even slashed interest rates would not end.
There has been a recent flurry of declarations by big fund managers with exposure to the office sector of commercial real estate that office CRE has “bottomed out,” or is “near bottom,” or that “we can at least now see the bottom,” or that “while we might not be at the bottom just yet, we’re close to it,” etc.
But Fitch Ratings has come out with an updated analysis of the US office market, and it doesn’t see the bottom just yet. Far from it.
“CRE office loan performance will continue to weaken as market pressures build,” it said about office loans backing the Commercial Mortgage-Backed Securities (CMBS) it rates.
It maintains its “’deteriorating’ outlook” on the office sector through 2024, citing:
- “Sustained higher interest rates” (buying into the Fed’s higher-for-longer)
- “Slower U.S. economic growth”
- “A tighter lending environment” (banks, up to the gills in iffy CRE debt, have severely restricted CRE lending, and so refinancing maturing CRE loans can be difficult to impossible).
- “And a secular decline in office demand” (as documented by the astronomical mindboggling amounts of office space that’s on the market for lease).
This “secular decline in the office market” has turned into a flood of office space that is vacant and on the market for lease, as companies have discovered that they don’t need this vast amount of office space, with availability rates in many big office markets at around 30%, topped off by 36% in San Francisco, which was a few years ago the hottest office market in the US (availability rates by Savills):
“These factors will exacerbate refinancing challenges, leading to rising loan delinquencies and transfers to special servicing for potential workout or modification,” Fitch said.
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