The performance of commercial real estate (CRE) office loans will further weaken as market pressures increase, according to the latest June 2024 edition of Fitch Ratings’ U.S. CMBS Office Dashboard.
“We maintain a ‘deteriorating’ outlook for the U.S. office sector until the end of 2044. Contributing factors include higher and sustained interest rates, slower economic growth in the U.S., a tighter credit environment, and a secular decline in office demand. We expect these conditions to increase refinancing difficulties, resulting in higher loan delinquencies and more loan transfers to special servicing,” states Fitch.
According to the rating agency, the recovery of the office sector will be slower and more prolonged during this cycle than after the global financial crisis, leading to permanent declines in property values, weaker performance, and higher credit losses.
“We have revised our forecast for U.S. CMBS office delinquencies upward to 8.4% and 11% for 2024 and 2025, respectively, from the 8.1% and 9.9% projected at the beginning of 2024,” note Fitch analysts.
Office buildings have the lowest refinancing percentage of any major property type. Urban office performance significantly underperformed expectations with a refinancing rate of 5% year-to-date in May 2024.
“We expect lower refinanceability for office loans maturing through the end of ’24, with a refinancing rate of 16% to 21% according to Fitch’s updated scenarios.”
Office loans account for 22% of the total U.S. CMBS portfolio rated by Fitch. The agency notes that most office loans maturing in the next two years will continue to have positive cash flow. However, Class B/C office properties, generally securitized in multi-borrower conduit transactions, are at greater risk of performance deterioration. Higher-quality single-asset/single-borrower (SASB) office loans have more desirable attributes and higher DSCRs and occupancies.
