The office market is getting gnarly

The office market is getting gnarly

Data: Trepp; Chart: Axios Visuals

The delinquency rate on office building-related mortgage bonds spiked in May, per a report from TreppEmily writes.

The big picture: Investors have been watching for this to happen since last summer — and May’s move may represent a “tipping point,” the data provider said in a note.

State of play: The office space market is in a tough spot thanks to the double-whammy of remote work and high-interest rates.

  • More employers are either downsizing their footprint or letting leases go entirely. Demand for space is down.
  • Last week, for example, Google said it was putting 1.4 million square feet of office space in Northern California up for sublease.
  • And, for those who need to refinance, costs have gone up.

Meanwhile, office defaults started rising earlier this year, and they’re even spreading to the fancier Class A buildings that were believed to be more insulated from the slowdown, as the WSJ recently reported.

Context: The last time the delinquency rate on commercial mortgage-backed securities was this high was in 2018.

  • That’s when mortgages that originated in 2006 and 2007 — before the financial crisis — were coming due and were difficult to refinance because the collateral they’d used had been overvalued.

The bottom line: The office sector is a changed place after the pandemic. With office occupancy rates nowhere near pre-COVID levels, you can expect this slow-moving distress train to keep chugging along.

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