Office CMBS delinquencies top 2012 record at 8.89%

Office CMBS delinquencies reached 8.89% in July, a record. Fitch Ratings, reporting through Connect CRE, puts that above the 8.83% peak from September 2012. A year earlier the reading was 8.0%.

The broader index moved less. It rose 16 basis points in July. That put the rate at 3.49%. June's reading was 3.33%. Fitch blamed the increase mostly on new office delinquencies and the default of a large mixed-use portfolio loan.

New 60-plus-day delinquencies in July reached $2.82 billion. June's total was $2.09 billion. Office led the new inflow at $1.12 billion, 40% of the month's total. Mixed-use contributed $728 million. Multifamily added $405 million. Retail chipped in $274 million.

Term defaults — loans falling behind during their term — made up 67% of those new delinquencies. That works out to $1.88 billion. Maturity defaults were the remaining 33%.

The distinction matters because a term default is a cash-flow problem. A loan trips during its term when the building is not generating enough rent to cover debt service. A maturity default, by contrast, is a refinancing problem. The refinancing side gets more attention, but term defaults are the operating reality beneath it.

Resolutions, the other side of the ledger, fell to $1.54 billion in July. June's figure was $1.63 billion. Liquidations accounted for $785 million. Loans brought current totaled $677 million. Another $77 million improved to 30 days delinquent and left the index. New delinquencies are running at about 1.8 times resolutions. Until that ratio turns, the delinquency rate has little room to fall.

Finmarc paid $77.5 million for the Tysons towers, which are 70% leased. At $168 per square foot, the price makes the vacant space the trade. Thor Equities agreed to pay $218 million for 1359 Broadway. The Midtown tower is 95% occupied.

Debt capital is moving in the same selective way. Cottonwood supplied $50 million of mezzanine to finish a condo tower. PGIM closed an $82.6 million bridge loan in a portfolio refinancing.

The 8.89% figure sets the broad scene. The underwriting question is narrower: which buildings produce enough rent to cover debt service, and which loans are already tripping term defaults. The $1.88 billion in term defaults says that for a meaningful slice of office, the answer is not enough rent. That kind of shortfall is the more expensive problem to resolve, and the term-default share is the number to watch.