US Commercial Office Loan Delinquency Rate Hits Highest Level in 11 Years

US Office Mortgage Securities Value 8% Loan Delinquency
Highest Since 2013... Remote Work Shock
Big Cut Expected This Month Yet Insufficient to Prevent Recession

Due to the prolonged high interest rates, the delinquency rate on loans for U.S. commercial offices has reached its highest level in 11 years. Despite expectations that the U.S. central bank, the Federal Reserve (Fed), may implement a 'big cut' (a 0.5 percentage point interest rate reduction) this month, pessimism has emerged in the office market, suggesting it may be too late to prevent a downturn.

On the 5th (local time), The Economist cited market research firm Trepp, reporting that as of July, loans equivalent to 8% of the value of mortgage-backed securities secured by U.S. offices were delinquent. This is the highest level since 2013. Amid high interest rates, commercial offices have faced particular difficulties in the real estate market due to the rise of remote work. The Economist expressed concern, stating, "Loans taken out by real estate companies that were active during the low-interest-rate boom before the (COVID-19) pandemic are now up for refinancing," adding, "This could pose significant challenges to financial institutions."

Although the Fed is expected to lower the benchmark interest rate from the current 5.25?5.5% for the first time since March 2020 this month, the office industry remains pessimistic. Most companies in the sector, which took out loans during the past zero-interest-rate period, believe that even with a rate cut, the rates will still be high. According to Bloomberg, Howard Marks, founder of Oaktree Capital and a well-known Wall Street investor, said at a conference in Melbourne, Australia, that day, "Even if the Fed lowers rates, they will not drop to 0, 0.5, or 1%," and predicted, "The U.S. benchmark interest rate will remain in the 3% range." This means office companies will have to borrow money at much higher interest rates when their loans mature.

The problem is that remote work has become the standard for companies. According to Moody's, even after the end of the COVID-19 pandemic, the office vacancy rate stands at 20.1%, the highest level since related statistics began being compiled in 1979. The Economist noted, "Last year, one-third of workers performed some or all of their tasks from home," and predicted, "The industry will hold on until 2025 hoping for a rate cut, but remote work will continue."

The Economist also warned that the fallout from the office crisis could spread to regional banks. According to credit rating agency S&P Global, in the U.S., more than 250 banks have issued commercial real estate loans to a degree that regulators consider risky. Most of these are regional banks.