Fitch Forecasts Office Performance Will Worsen Through 2025

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Commercial real estate office loan performance will weaken further as market pressures build, according to Fitch Ratings’ latest U.S. CMBS Office Dashboard.

“We maintain a ‘deteriorating’ outlook on the U.S. office sector [through year-end 2024],” the report said. “Contributing factors include sustained higher interest rates, slower U.S. economic growth, a tighter lending environment and a secular decline in office demand. We expect these conditions to heighten refinancing difficulties, resulting in higher loan delinquencies and more loan transfers to special servicing.”

Fitch forecast the office sector’s recovery will be slower and more drawn out than after the Global Financial Crisis rebound and said this will lead to “permanent impairments” in property values, weaker performance and higher loan losses.

The ratings firm revised its CMBS office delinquency forecast upward, to 8.4% and 11% for 2024 and 2025, respectively. It had forecast 8.1% and 9.9%, respectively, in early 2024. “Negative rating actions could be triggered by declining office NOI, worsening national office performance metrics, wider office market cap rates, still-constrained transaction volume and outsized appraisal valuation declines on specially serviced office loans compared to issuance,” the report said.

Fitch noted office has the lowest refinance percentage of any major property type. “Urban office significantly underperformed our expectations with a year-to-date May 2024 refinance rate of 5%,” the report said. “We expect lower refinanceability for maturing office loans through YE24, with a 16%–21% refinance rate under Fitch’s updated scenarios.”