A credit crunch for landlords with maturing mortgage debt on office buildings has dropped the rate of timely loan repayments to below 70%, according to Deutsche Bank researchers.
That’s a sign of mounting stress in the estimated $3.2 trillion U.S. office market as landlords with typical 10-year property loans face tighter credit conditions and higher rates as a wall of debt comes due.
“The office credit crunch has reduced [the] timely office payoff rate from 93% in mid 2021 to below 70% today,” Ed Reardon’s research team at Deutsche Bank wrote, in a Wednesday client note.
The payoff rate is based on a six-month average for office loans financed in Wall Street’s commercial mortgage backed securities market. Late repayments don’t guarantee a borrower will default but often signal that debt relief, a default or a foreclosure is possible.
Until the pandemic, the office sector was widely considered a relatively safe, steady corner of the commercial real-estate market. That changed with the slow return of workers to office buildings since the COVID crisis.
Related: San Francisco’s office market erases all gains since 2017 as prices sag nationally
The Federal Reserve’s inflation fight also has short-term rates at a 22-year high, raising the costs of everything from mortgages to corporate debt becoming more expensive.
Furthermore, many property owners were required only to pay interest each month on mortgages financed by Wall Street, but not principal, resulting in big balloon payments when the debt comes due. Landlords often seek to keep refinancing old debt, unless a property sale is in the works.
“Recent monthly data indicate that office timely payoffs will fall further,” Reardon’s team wrote.
Adding pressure to markets, the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
was back near a multidecade high of 4.29% on Wednesday. Higher benchmark rates and a skittish tone in the commercial mortgage market following the sudden collapse of several reginal banks in March has tightened credit conditions this year.
See: FDIC kicks off $33 billion sale of seized assets from Signature Bank
Stocks were lower Wednesday, with the S&P 500
SPX,
Dow Jones Industrial Average
DJIA
and Nasdaq Composite Index
COMP
each facing back-to-back declines.
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