The CMBS Market Is Warming Back Up To Office Debt

The CMBS market has come roaring back this year, bringing liquidity to the most beleaguered corner of commercial real estate: the U.S. office market. 

There was $74B of CMBS debt issued in the first nine months of the year, up from $40B in the same period of 2023, according to an S&P Global Ratings report. The ratings agency projects $90B of issuances by the end of the year, raising its earlier projection by $10B.

“An important change in the environment has been the increasing availability of debt financing at scale for office assets in the CMBS market with relatively attractive pricing,” Owen Thomas, the CEO of BXP, formerly Boston Properties, said on a call with analysts last week.

According to Trepp, CMBS lending in the first half of the year almost tripled the historically low rate from the same period in 2023. The CMBS tracking firm projected that $100B of CMBS loans could be underwritten this year despite uncertainty from the election.

“A new market phenomenon, which is very constructive ... is the opening of the CMBS market for the office sector,” Thomas said. “I think that will help buyers create liquidity to buy things.”

The sea change in the CMBS market was underlined last month by the largest-ever single-asset issuance on an office property.

Tishman Speyer secured a $3.5B CMBS financing deal for Rockefeller Center, the iconic 7.3M SF office and retail campus in Manhattan, helping the firm retire a $1.7B CMBS loan and mezzanine financing that was set to mature in May 2025. The new debt had a fixed interest rate of 6.2%.

Darrell Wheeler, the head of CMBS research at Moody’s Ratings, said the recent surge in CMBS activity was likely prompted by the drop in the 10-year Treasury rate, which fell from a high of nearly 4.5% in April to a low of 3.7% in September.

“A lot of it is just the rate story,” Wheeler said. “For [borrowers], it was just a bird in the hand at the time.”

Wheeler said the surge in CMBS issuance won't solve the onslaught of loan maturities and distress facing the office market. More than 9% of office-backed CMBS loans were delinquent at the end of October, according to Trepp, the highest delinquency rate since 2013.

“Anybody who may be saying this is the savior of the poor location, they’re not likely right,” Wheeler said.

But Blackstone Mortgage Trust Senior Managing Director Katie Keenan said during the firm’s third-quarter earnings call last month that investors are growing less concerned about negative outcomes with office investments, with many experts believing valuations and office performance have reached their bottom. 

“You can see it in particular in office issuance in the CMBS market,” she said. “People did not know, quote-unquote, ‘how bad it was going to be’ in terms of the real estate market. I think, really, a lot of those questions have been answered at that point, and you can see it in the capital markets today and the indicators, whether it’s the REIT market, whether it’s what’s going on in the CMBS market.”

CMBS loans accounted for 8.6% of nonagency CRE loans in the second quarter, up from 3.8% a year earlier. 

While pricing for office assets may have reached the bottom and office leasing is picking up, there is plenty of distress in the market that must be sorted through.

S&P has downgraded 487 classes of CMBS bonds over the past year, a majority of which were backed by office buildings. More than 12.5% of office CMBS loans were in special servicing in September, according to Trepp, and 7.6% of CMBS office loans were modified in the third quarter, according to S&P.

“There’s just a lot of office stock out there in existing CMBS deals, and regardless of how much lending is going on … they are so underwater and so vacant that distressed stock is going to hang around for a while,” said David Putro, the head of CRE analytics at Morningstar Credit. “Any additional liquidity in the system is going to help. But we’re obviously still wary of office.”

Office owners able to secure new financing typically have to swallow some form of concession. At Rockefeller Center, Tishman Speyer's annual interest payments are expected to double with the new debt, Crain's New York Business reported.

Stahl Real Estate also secured a $750M single-asset CMBS loan tied to the 1.8M SF 277 Park Ave. tower in Midtown Manhattan to refinance debt that was coming due in August. The landlord had to pay $283M in equity to refinance, Crain's reported.

Office properties made up 21% of the assets bundled into conduit CMBS loans in the third quarter, up from 19% in Q2. 

“Conduits have become a vital source of capital for office borrowers as other sources remain difficult to access,” S&P researchers wrote in their report.

Office buildings with sizable vacancies expected in the coming years are still struggling to refinance. But the opening of the securitized debt markets still represents a meaningful shift from the lending freeze last year.

“We’re seeing office loans get extended. Not in great numbers, but they are getting done,” Putro said. “It’s not the extend and pretend of old. It’s on the things that are maybe a tenant or two away from being stabilized.”