Office Loan Delinquencies Rise as Market Shifts in 2024

Office utilization has stalled, the latest CommercialEdge office report shows, while property values have dropped and interest rates for new loans and refinancing remain high.

Office loan defaults and delinquencies are increasing in 2024, with hundreds of billions in loans maturing soon.

Over $260 billion in office loans have matured recently or will mature by the end of 2026, affecting 30 percent of all office loans and more than 12,000 properties. The risk is uneven across markets; Atlanta leads with 48.3 percent of its office loan volume maturing, followed by Denver (41.8 percent), Nashville (41.7 percent), Chicago (40.7 percent) and the Twin Cities (39.2 percent).

Maturing loans are mostly in prime properties and city centers, with $164.5 billion (62.6 percent) in urban submarkets and $187.7 billion (71.4 percent percent) in Class A buildings. Delinquencies are rising, with $1.87 billion in office loans newly delinquent in June, pushing the sector’s delinquency rate to 7.5 percent, up from 4.5 percent last June and 5.8 percent at the end of 2023.

Discount purchases have surged in 2024 and are expected to continue, with all-cash sales likely increasing as lenders reduce their office exposure and debt costs stay high. Bargain hunters with cash will have opportunities, while those with strong track records may fare better.

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In June, the office-using sector lost 2,000 jobs; The segment grew by just 0.3 percent year-over-year, expanding by 94,000 workers. The decline was spearheaded by 17,000 job losses in the professional and business services sector. On the other hand, the information sector added 9,000 positions, while financial activities added 6,000 jobs in June.

The national office vacancy rate clocked in at 18.1 percent at the end of June, a 100-basis-point increase from the same time in 2023. Vacancy rates have increased across almost all markets, with San Francisco and Dallas (430 basis points), Los Angeles (350 basis points), Austin, Texas, and Seattle (310 basis points), and Charlotte, N.C. (300 basis points) seeing the most significant rises year-over-year.

National full-service equivalent listing rates averaged $31.67 per square foot in June, unchanged year-over-year. Starting with this month, CommercialEdge now includes all 120 markets in its national average listing rate, not just the top 50. Therefore, current and future national figures aren’t comparable to pre-July 2024 reports.

Some of the markets with the highest increases in average in-place rent were Boston (7.4 percent), Dallas (6.7 percent), Miami (6.1 percent), Atlanta (4.4 percent), Tampa, Fla. (3.1 percent) and Detroit (2.2 percent).

Construction pipeline continues to shrink

The office under-construction pipeline continues to decrease, featuring 76.9 million square feet underway as of June, representing 1.1 percent of total stock. As of June, 23.5 million square feet of office space was completed, while new project starts totaled 6.9 million square feet, CommercialEdge shows.

Demand for office space is not expected to return to pre-pandemic levels. Additionally, banks are reluctant to finance new office projects, and higher interest rates have made existing construction loans costlier.

In Boston, the active pipeline totaled some 12.5 million square feet, representing 5.0 percent of total stock. Austin had 4.3 million square feet of office space underway, or 4.6 percent of stock. San Diego (4.9 million square feet) and Miami (2.9 million square feet) came in third with 4.0 percent of stock. San Francisco had 4.9 million square feet of office space under construction, representing 3.1 percent of stock.

Office investment in the first half of 2024 totaled $13.7 billion, according to CommercialEdge data. At the same time, the average sale price for a property stood at $172 per square foot. Manhattan spearheaded office investment, amounting to $1.4 billion in total, followed by Washington, D.C., with $1.3 billion in office sales.

Read the full CommercialEdge office report.