Office Mortgages ‘Living On Borrowed Time’ Says Goldman, Delinquencies Tick Up

Commercial office property and related loan woes continue haunting the U.S. banking sector, and the specter likely will loom for quite some time.

Concerns around exposure to commercial real estate loans have rocked the stock prices for a number of regional banks in the past year, in the aftermath of a string of bank failures last year. Higher interest rates have made it harder for borrowers to refinance and declining property values have only complicated matters further.

About 6.63% of all commercial official mortgages were delinquent in February, up 33 basis points (bps) from January, according to research firm Trepp.

The increase mirrors the average monthly increase of the past 12 months; a year ago, just 2.38% of all office mortgages were delinquent, Trepp’s report said.

The rising loan stress reflects a U.S. office market that has faced declining demand for eight straight quarters. Office vacancies reached an all-time high of 19.7% as 2024 began.

“Commercial real estate is a slow burn—a classic burn,” Bank of America CEO Brian Moynihan said this week in an interview with Bloomberg Television.

Office Loans ‘Living on Borrowed Time’

Fuel for that fire, however, primarily has come from office properties yet to recover—and those that may never do so—from the pandemic.

Analysts at Goldman Sachs said “office mortgages are living on borrowed time,” in a note this week.

As loan stress mounts, Goldman noted extensions and modifications of existing debt have pushed the amount of commercial real estate loans scheduled to mature by the end of 2024 to $929 billion. That’s up 41% from a year ago.

Even though banks have raised allowances for commercial real estate loan losses, Goldman expects the modifications trend will continue, at least for now. Banks may not be able to stomach that wave lasting much longer, though.

“The ongoing downward pressure on office property prices and net operating income growth could push borrowers to strategically default, while the ability of balance-sheet constrained lenders to continue to amend and extend loans could diminish over time,” Goldman said.

Office Loan Distress May Not Spill Over

In Trepp’s monthly update, the delinquency rate for the entire commercial real estate market increased 4.71%, up from 3.12% from a year ago. That’s almost entirely a function of the beleaguered office market.

Retail delinquencies fell to 6.03%, down from 6.75% a year ago. By comparison, multifamily and industrial delinquencies remain essentially steady from a year ago, with rates in those sectors under 2% and 1%, respectively.

Goldman downplayed the chances that the distressed sales and falling property values in the office sector would ripple through the rest of the commercial property market.

In addition, the investment bank noted that banks remain in more robust capital positions than before the 2008-09 global financial crisis and the 1980s savings and loan crisis.