Moody’s Warns of Office-Loan Delinquencies Surge in 2024

Moody’s Investors Service predicts that office-loan delinquencies, already at a 5-year high, will continue to rise in 2024 due to higher borrowing costs and economic factors. Commercial real estate outlook heavily influenced by Federal Reserve decisions.

Commercial real estate in 2024 is expected to be heavily influenced by the Federal Reserve's decisions on interest rates and the overall state of the economy, according to Moody’s Investors Service. The delinquency rate for office loans, which are bundled into bond deals, reached a five-year high in November and is projected to continue rising in the coming year. This increase is attributed to borrowers facing higher borrowing costs as a result of maturing debt and low rates at the time of financing.

The 10-year Treasury yield, which serves as a financing benchmark for the commercial real estate market and the broader U.S. economy, experienced extreme volatility in 2023. Despite this, the year ended with the rate trading near its starting point and the Federal Reserve considering further interest-rate hikes. The rise in borrowing costs has caused significant stress for property owners, particularly in the office sector, where revenue has sharply declined. The current trend suggests a reduction in office demand due to the shift towards hybrid work arrangements, leading to tenants seeking to renew leases at lower rates and for less space.

In addition to these challenges, there is a substantial amount of U.S. commercial property debt set to mature through 2025, further adding to the complexities of the market. Regulators have identified commercial real estate as a top threat to the financial system in 2024. However, Moody's expects overall CMBS loan delinquencies to remain below 6% in the coming year, despite the tough market conditions.

The commercial real estate market in 2024 is expected to face significant challenges, particularly in the office sector, as a result of higher borrowing costs, reduced demand, and maturing debt. While the overall outlook is uncertain, Moody's anticipates that loan delinquencies will not exceed 6% in the coming year.