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Key Takeaways
- The commercial mortgage delinquency rate increased 59% in the past year.
- Office properties once again were the type of property with the highest rates of delinquency.
- Office space is more likely to empty and less likely to be built than they were this time last year.
U.S. commercial mortgage delinquencies rose in January, led by the beleaguered office market.
The Trepp Commercial Mortgage-Backed Securities (CMBS) Delinquency rate for all commercial properties rose to 4.66%, up from 4.51% in December and just 2.94% in January 2023. That represents a 59% increase in the past year.
Office properties remain the most troubled sector of the commercial property market, as they did throughout last year. Delinquencies in that space rose to 6.30% in January, more than three times the rate of 1.86% in the same month a year ago.
One explanation for the tumult in the office market: A fifth of U.S. office space was vacant during the fourth quarter, according to a report released mid-January by commercial property services firm Cushman Wakefield. That’s an all-time high, up from 17.7% in the fourth quarter of 2022 and up slightly from 19.2% in the previous quarter. U.S. office space now has declined for eight consecutive quarters, Cushman’s report said.
As vacancies have increased, the national average asking rents have remained essentially flat, rising just 44 cents year-over-year to $37.67 per square foot in the fourth quarter of 2023.
Meanwhile, office construction has fallen by more than half since 2020, with 59.9 million square feet currently being built, compared with the five-year average of 102 million square feet. Office space under construction fell by 5.3% in the fourth quarter from the previous quarter.
Though the office market remains under pressure nationwide, it remains highly variable depending on the region and metropolitan area.
For instance, office vacancies in the Fort Myers and Naples area in Florida equaled just 4.1% in the fourth quarter, according to Cushman’s report. At the other end of the spectrum, nearly a third of all office space in downtown San Francisco was vacant, the highest rate in the nation.