Commercial Delinquencies Up In Q1 2024 Thanks To CRE Stressors

Commercial mortgage delinquencies rose in Q1 2024 as the CRE world faces a mountain of financial stress.

The Mortgage Bankers Association’s (MBA) latest Commercial Delinquency Report focuses on delinquencies for five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, and Fannie Mae and Freddie Mac. These groups hold more than 80% of commercial mortgage debt outstanding.

“Commercial mortgage delinquency rates continued to increase during the first three months of 2024,” said Jamie Woodwell, MBA’s Head of Commercial Real Estate Research. 

“The increase was seen across most capital sources, pointing to the challenges caused by loans that are maturing amid higher interest rates, uncertain property values, and questions about some properties’ fundamentals.”

More than $900 billion in outstanding commercial mortgages held by U.S. lenders and investors comes due this year. At the same time, commercial real estate is facing record-high vacancy rates, especially in office spaces as more Americans seek remote work.

Based on the unpaid principal balance (UPB) of loans, delinquency rates for banks and thrifts (90 or more days delinquent or in non-accrual) were 1.03%, an increase of 0.09 percentage points from the fourth quarter of 2023. Life company portfolios (60 or more days delinquent) were 0.52%, an increase of 0.16 percentage points.

Fannie Mae (60 or more days delinquent) and Freddie Mac (also 60 or more days) were at 0.44%, a decrease, and 0.34%, an increase, respectively.

CMBS delinquencies (30 or more days delinquent or in REO) clocked in at 4.35%, an increase of 0.05 percentage points from Q4 2023.

But Woodwell emphasized that the data shows these institutions preparing for future difficulties, possibly insulating themselves from major damage.

“It is important to recognize that different capital sources track delinquencies in different ways – and with good reason. The rise in delinquency rates for commercial mortgages at banks was driven by banks designating non-multifamily loans – in particular, office – as ‘nonaccrual,’ meaning the loan may still be current on payments, but the lender does not expect to be paid in full,” she explained.

“The increases in such loans, and the associated net-charge-offs at large banks, can be seen as evidence of the institutions working to get ahead of potential future defaults.”   

Commercial real estate will continue to change in the post-pandemic world, but the specifics are still hazy, according to Richard Barkham, global chief economist for Dallas-based brokerage CBRE.

He told CoStar that office space will likely follow the path of regional malls– they will eventually be repurposed, redeveloped, or torn down, and their investors will land on their feet– the only question is when, and how difficult that transition will be.

“I think that’s probably likely what’s going to happen to office, but it’s going to fully recover around a smaller footprint,” he said.