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