Context with Perspective in Commercial Real Estate: CMBS Delinquency Rates & the Math of it All

There has been a lot of talk around CMBS delinquencies over the past few months as the overall rate and some of the individual property types have seen sizable increases.?

Trepp, Inc. publishes a monthly delinquency report that measures delinquency across the major property types each month (Industrial, Lodging, Multifamily, Retail, Office).? We have been tracking this data since January of 2000.? This provides Trepp with a comprehensive perspective of what delinquency trends have been throughout the market cycles over the past 20+ years.?

The calculation of the delinquency rate is a basic division formula of delinquent loan balance over total outstanding loan balance.? The same formula is applied to the individual property types, but the sample is limited to outstanding loan balances from just those property types.?

The results get incorporated into our monthly report and disseminated across our distribution channels.? Nothing about the math is “sensationalized” “hyped up” or used to generate additional clicks.? At the end of the day, it’s just math.?

When a property sector hits a milestone level of delinquency, on the low end or high end, it is stated as such.? For example, this December saw the Office sector exceed its previous all-time high delinquency rate.? The previous high-water mark for Office delinquency was 10.70% in December of 2012.? The delinquency rate in December of 2024 was 11.01%.?

Given where we are in the market cycle it’s understandable that delinquency rates are something everyone is paying attention to.? We are multiple years into what’s been teased as a significant disruption and incredible “distressed” buying opportunity.? Unfortunately for those distressed buyers, higher delinquency rates haven’t ultimately translated into the bloodbath they have been hoping for.? Instead, banks and other lenders have worked with borrowers to provide extensions, loan modifications and other acceptable forms of borrower lifeline(s) to keep the music playing.? The supposition is that at some point the delinquent loans will become available at favorable pricing for distressed buyers, it just hasn’t happened (at scale) yet.

Everyone wants to know how the current delinquency data compares to previous CRE market disruptions so they can point out why this run up in delinquency is either a time to sound the alarms or nothing to worry about from their perspective.? I agree that context is always valuable.? Context allows for better comparison and more insight.? However, looking at old delinquency data without perspective doesn’t always provide the type of context people are looking for.

Calculating the delinquency percentage is an easy to execute math equation.? Understanding why a property has gone delinquent isn’t such an exact equation.? Some borrowers strategically default to try and gain leverage to negotiate an extension or modification.? Some properties can’t generate enough NOI to cover Debt Service because that individual building doesn’t provide tenants with the utility they demand and therefore occupancy and revenue generation is negatively impacted.?

In other scenarios there are macro events such as work from home or interest rates that negatively impact an entire CRE sector.? In my 24 years of CRE experience, no two downturns or disruptions are the same.? They may have similar results but are usually caused by different market drivers.?

The other challenge to blindly relying on historical numbers as a direct comparison is that the underlying sample changes every month.? New properties become delinquent, properties that were delinquent, cure, new loan originations take place and existing loans payoff.? This exercise is not a “same-store” analysis.

Even with these nuances, I’ve pulled together some of the historical data points to try and provide the requested “context.”

The average and median delinquency rates from January 2000 through December 2024 are shown in the table below.?

A few high-level take-aways from the median delinquency data points are as follows:? It highlights how much the GFC and/or Covid distort the overall delinquency picture.? Industrial, Lodging & Multifamily have only had between 80-100 months of the 300-month history where the delinquency rate for those sectors exceeded their 300-month average.?

Retail is the only property sector where we see left skew, indicating just how damaging and prolonged the “retail apocalypse” has been.? The delinquency rate for retail has been above the average for 183 of the 300 months, or 61% of the time.

The highest delinquency rates for each sector between the same January 2020 through December 2024 time frame are shown below:

Some commentary and takeaways from each of the high-water marks are provided below.

The peak Overall delinquency rate occurred about four years after the beginning of the Great Financial Crisis (GFC) in July of 2012.? The challenges brought on by the GFC impaired all property types at some level and highlighted the negative consequences of pro-forma underwriting and bond ratings that didn’t match the underlying collateral.? As the capital markets dried up, the delinquency numbers spiked.?

Fast forward to the Covid-driven delinquency which peaked at an overall delinquency rate of 10.30% (second highest on record) in just about 60 days after the mid-March lockdowns went into effect and when the June monthly delinquency reporting was completed.?

Industrial peaked in May of 2012 driven by the same GFC factors that impacted the overall rate in July.? It peaked at about four times its historical average.? Industrial has been on an incredible bull run post Covid and has only one month out of the last forty-eight months where delinquency wasn’t below 1.0%. The one month above 1.0% was the result of one large Single Asset Single Borrower (SASB) loan that was in the process of exercising one of its extension options. ???

Lodging peaked in June of 2020 driven solely by Covid and the government-imposed lockdowns.? Lodging delinquency in March of 2020 was 1.53% and it sat at 2.71% in April.? In May of 2020 it ballooned to 19.13% before peaking at 24.30% in June.? It fell below 10% in October of 2021 and hit its post Covid trough at 4.23% in April of 2023. ?

Multifamily is the property sector that surprised me the most when looking back at its delinquency history.? It peaked in April of 2011 at 16.93% but had a 50 month stretch where it was above 10% from January 2010 through February 2014.? It is important to point out that the Multifamily delinquency data calculated by Trepp doesn’t include the securitized Agency debt (Fannie & Freddie which have historically had significantly lower delinquency percentages).? The numbers in this post only reflect the non-agency CMBS multifamily loans.

Multifamily was above 16% delinquency from December 2010 through November 2011.? Contrast that to the current multifamily delinquency rate of 4.58% which feels high given the overall strength of multifamily over the past decade.? If multifamily delinquency hit 16% in today’s social media driven world, we would have to find a new measurement for click-bait. In December of 2015, the multifamily delinquency rate was at 8.28%.? It fell to 2.31% in January of 2016 and hasn’t risen to 5% since then.

Retail hit its peak delinquency of 18.07% in June of 2020.? The Covid lockdowns were nearly as detrimental to the retail sector as they were to the lodging sector.? In March of 2020 the retail delinquency number was a paltry 3.89% and was even lower at 3.67% in April of that year.? It moved to 10.14% in May and peaked in June at over 18%.? Retail, like lodging, recovered quickly and was below 10% delinquency by September of 2021.? It hasn’t moved outside of single digits since that timeframe.? The retail delinquency numbers in CMBS are hampered by a lot of legacy regional and superregional mall loans that have been made over the past 10-15 years.? If those loans are removed from the calculation, retail is experiencing a very low amount of delinquency. ?

Office just reached its peak delinquency number of 11.01% in December of 2024.? While this number on a percentage basis doesn’t come close to the 24.30% or 16.93% peaks of the lodging and multifamily sectors respectively, the volume of delinquent office loans is much larger.?

We will provide a more thorough review of the dollar volumes of the delinquency across all property sectors in a separate post, but here are a few high-level data points.?

In December of 2024, Trepp was tracking a total outstanding loan balance for the office sector of $160.95B compared to $82.74B for lodging and $60.45B for multifamily.? Office had approximately $17.71B worth of delinquent loans as of December compared to $5.08B for lodging and $2.77B for multifamily.?

The volume of delinquent Office loans is many multiples of the other property sectors and thus, should be garnering the type and scale of interest it is receiving.? It’s not hyperbole. The data is the data.?

The justified concern for the office sector hitting this level of delinquency is two-fold in my opinion.? One, as exhibited above the sheer size of the office market is in most cases many multiples of the other individual property sectors and two, the catalyst driving the Office delinquency doesn’t have a clearcut short to medium term solution.? The paradigm shift(s) of office workers to work from home or hybrid working situations has made very clear how functionally obsolete a very large swath of office properties are.? One can debate whether people eventually return to the office on a more permanent, full-time basis.? I happen to believe people will ultimately be back in the office at least three days a week, at scale, over the next 36-48 months.

However, even if that happens it won’t fix the mathematical problems that exist on the debt side of the equation.? Offices that were financed with 3.5% mortgage rates and with values derived from 5.5% cap rates will not be able to refinance in today’s higher rate environments without significant capital contributions by the borrowers.? Borrowers eventually are going to stop putting cash into these older, obsolete assets that can’t compete with newer, highly amenitized offices.?

Below is a snapshot of office financings over the past several years.

The cap rate numbers jump off the page to me going back to 2015.? For new Office originations, weighted average cap rates have been between a low of 5.485% to a high of 6.422%.? These same “functionally obsolete” office properties we are seeing become delinquent in 2024 were getting financing in 2018, 2019, etc. at sub 6.0% cap rates.?

In 2021, when the stimulus was in full effect, we saw 893 office properties get financed across 583 loans to the tune of $36.4B worth of new origination.? The average loan size for those vintage loans (2021) was $40.8M.? I have a hard time believing many of those loans would get done today…. Therein lies the challenge.?

In the CMBS market, many office loans are full-term interest-only loans.? That means no principle paydown over the life of the loan.? These borrowers need the property to go up in value or for financing terms to become more favorable for them to be able to refinance at the end of their loan term.? With what we’ve seen take place over the last 4-5 years, neither of those things have occurred.

There are a lot of upcoming office maturities slated for 2025.? The data would suggest we see office delinquencies hit 12-14% over the first two quarters of 2025 based on those maturities.?

In the first quarter of 2025 there are $7.07B worth of maturities, $11.01B in the second quarter, $10.31B in the third quarter and $7.00B in the fourth quarter.? That’s almost $36B worth of Office maturities during 2025.?

I personally wouldn’t be shocked if we see office delinquencies inch closer to 20%, but that would take more than maturity defaults.?

What does all this mean?? Well, it depends on your perspective and what your objective within the CRE eco-system is.?

If you’re a distressed buyer your day will come.? We’ve learned over the past few years that actual distress moves slower than the headlines.? We also know that the debt distress is usually a lagging indicator as compared to market transactions.? We can have increasing delinquency and a stronger, more viable sales transaction market at the same time.? Both statements can be (and are currently) true.?

If you’re a lender, you’ve still got your work cut out for you when trying to move deals that were done at 3.5-4.5% interest rates to the current 6.5%+ interest rates of today’s market.?

If you’re an Office owner/operator you’ve been facing challenges from every angle.? Higher inflationary expenses in the form of insurance, repairs and maintenance, tenant improvement allowances, etc. as well as the dark cloud of higher interest rates.? If you don’t have an upcoming loan maturity, you’re probably sleeping better than those that do.? If you do have an upcoming maturity, you’re actively trying to extend the lease terms of your building’s tenants, effectively managing your expenses more than ever before and trying to increase occupancy so you don’t have to bring money to the table to refinance your loan.? You’re also hoping for increased in-office workers to return in force and using those talking points to help sway your lender.

Delinquency is just like any other data point.? It represents a single component of the market, at a point in time.? It doesn’t, by itself, signify where the market is in every region, location, or building.? It doesn’t mean that this market disruption is lesser or worse than previous disruptions, but it does give a broad perspective of how many properties are struggling.

I’ve said it at least 100 times on our TreppWire podcast.? Real estate by definition is a local and sometimes a hyper local endeavor.? Two buildings on the same street can have substantially different outcomes.? Broad based data points reflect what’s taking place but don’t define your local market.? ??

One thing I’ve learned over the years is that everyone in CRE is always talking their book.? Perspective is a powerful thing.? Context is sometimes limited to one’s perspective and where their book sits relative to the cycle.?

Participants that generally cheer more distress stand to benefit from increased distress and those that downplay the distress stand to benefit from more non-distressed transactions taking place.?

At the end of the day, the delinquency rate is just the product of math, and the data used for the calculation is objective.? Hopefully this post has provided some additional context and insight.