Commercial Real Estate Delinquency Rates Increase In 4th Quarter

Authored by Naveen Athrappully via The Epoch Times,

Mortgage delinquency rates for U.S. commercial properties rose in the fourth quarter of 2024 from the previous quarter.

The Mortgage Bankers Association (MBA) published the latest figures as commercial loans worth almost $1 trillion are set to mature this year.

The state of commercial real estate is a key economic indicator. If the sector is under stress, it can trigger a chain of loan defaults, creating challenges for the financial system and posing a risk of broader economic decline.

The MBA looked at delinquency rates for the top five capital sources for commercial mortgages—life insurance companies, commercial and thrift banks, Fannie Mae, Freddie Mac, and commercial mortgage-backed securities. Combined, they account for over 80 percent of outstanding commercial mortgage debt. Excluding life insurance, delinquency rates rose for all the four remaining groups in Q4, 2024, the MBA said in a March 20 statement.

The largest jump was seen among commercial mortgage-backed securities—mortgages on commercial real estate properties packaged as investment products—with the delinquency rate rising 0.63 percentage points from the third quarter.

Commercial and thrift banks, Fannie Mae, and Freddie Mac registered marginal increases in delinquency rates in the fourth quarter.

Mike Fratantoni, MBA’s chief economist, warned that some trouble could lie ahead for the sector given that a significant amount, nearly a trillion dollars, worth of loans are maturing in 2025.

“These maturities, coupled with more challenging economic conditions and rangebound interest rates, may result in some further increases in delinquencies if borrowers cannot successfully refinance these loans.”

While the delinquency rates rose in Q4, they remain “relatively low from a historical perspective,” he said.

This is despite the fact that the commercial real estate market has been facing challenges such as “low occupancy rates and the uncertain impact of return-to-office mandates in the office market, and oversupply in the multifamily property market,” he said.

A December 2024 report from the Financial Stability Oversight Council, a department that falls under the U.S. Department of the Treasury, flagged commercial real estate as a key area of concern for America’s financial stability.

The oversight council cited the sector’s slowing rent growth, rising vacancies, and higher borrowing costs as ongoing challenges. Office property vacancy rates in urban regions hit decade-high levels, the report said, adding that the trend worsened due to the shift to remote work.

“Office properties in large urban metro areas are experiencing the most stress, suggesting the larger financial institutions likely to hold these loans may face particularly elevated risks,” the report said.

Outlook for 2025

Financial services company JP Morgan carries a positive outlook for commercial real estate this year, according to a Jan. 2 report.

“The industrial sector remains the industry’s darling. Multifamily and retail continue to perform well, although they do have vulnerabilities. In some markets, even office vacancy rates are beginning to moderate,” it said.

JP Morgan said said the high frequency of natural disasters, which are “growing more intense” and becoming costlier, is a key challenge facing the market.

Another risk is the uncertainty regarding the Federal Reserve’s benchmark interest rates.

While the Federal Reserve is expected to cut rates this year, there is “no guarantee” that these projections will come to fruition.

Victor Calanog, global head of research and strategy, real estate private markets at Manulife Investment Management, expects commercial real estate to be in a “better place compared to the last few years.”

“It appears that the landing will be relatively soft, so that should mean continued positive momentum for economic activity, benefiting leasing and income drivers, including rents and occupancies,” Calanog said.

Meanwhile, many empty office spaces are now being repurposed into residential spaces, Doug Ressler, business intelligence manager at real estate data acquisition company Yardi Matrix, previously told The Epoch Times.

“There’s been a growing change from the 1980s and 1990s, when office buildings were the primary staple of commercial real estate,” he said.

“For the past few years, there’s been a glut of office buildings, and we’ve reached a saturation point. Because demolition is often too costly, building owners are converting the property to residential, as the need for more housing continues.”

Ressler said that hotels are not seeing the traffic they once used to, whether from business or leisure travelers, with some hotels reeling under the impact of lost revenues.

As such, “building owners have opted to modify their properties to apartments. These tend to be the most cost-effective conversions with little modifications,” he said.

As for how banks may fare in a commercial real estate crash scenario, the Fed’s stress test from last year suggests institutions have enough capital, and should be able to weather the crisis.

The stress tests looked at the banks’ performance when faced with a severe global recession, a 40 percent dip in commercial real estate values, a 36 percent drop in house prices, among other factors.

The Federal Reserve announced the 2025 stress test scenarios last month, with results due to be released in June.