• CRE Daily
  • Posts
  • Commercial Mortgages Signal Banking Strains in CRE

Commercial Mortgages Signal Banking Strains in CRE

Only 26% of the $35.8 billion in office CMBS loans that matured in 2023 were fully paid off.

Good morning. There are growing concerns regarding office loans, as evidenced by rising distress signals in CMBS loans. At the same time, cash-ready investors are capitalizing on opportunities in commercial real estate, taking advantage of the difficulties property owners face.

πŸ‘‹ First time reading? Sign up.

🎁 Want free merch? Share this.

Market Snapshot

S&P 500
Pct Chg:
Pct Chg:
10Y Treasury
Pct Chg:
Pct Chg:
*Data as of 2/12/2024 market close.

Banks' Exposure to CRE

What Mortgage Bonds Say About the Office Meltdown

The U.S. office market's distress, especially in commercial mortgage-backed securities (CMBS), signals looming troubles in bank loan portfolios, implying that the challenges caused by poor office loans are just beginning.

What happened: Banks in the U.S. are a major source of commercial real-estate loans, holding about 50% of all such loans. However, the health of these loans often remains unclear until problems become acute. Recent cases like New York Community Bancorp and Aozora Bank, which set aside massive provisions for expected losses on U.S. office loans, highlight the emerging crisis. Their share prices plummeted as a result, signaling trouble ahead for the lending sector.

The proxy: Commercial mortgage-backed securities, making up 14% of U.S. commercial real estate lending, offer valuable insights into the sector's health. The CMBS market provides detailed monthly data on default rates and property valuations, revealing a worrying trend: only 26% of the $35.8 billion in office CMBS loans that matured in 2023 were fully paid off as borrowers struggled to refinance or sell their properties.

Rising distress: The CMBS market is witnessing a rapid increase in troubled loans. By January's end, 10.5% of office CMBS debt was distressed, a more than 3x increase from the previous year, reports CRED iQ. The situation will likely worsen with an additional $46.6 billion in CMBS office loans maturing through 2025. Recent revaluations of such properties have shown an average valuation decline of 40%, further worsening the issue.


Bracing for impact: While banks' loan books might not mirror the dire situation of CMBS loans, they are not immune to the real estate sector's downturn. The upcoming maturity of loans poses a risk of unforeseen setbacks for bank shareholders. Moreover, the growing trend of office buildings selling at significant discounts will increasingly affect loan valuations, signaling a challenging reality check for banks.

✍️ Editor’s Picks

  • Resilient Austin: The Milken Institute ranked Austin-Round Rock as the best-performing large city due to its rapid growth in jobs, wages, and high tech.

  • Building prosperity: New CRE development in the U.S. in 2023 resulted in direct expenditures of $913.1B and contributed $2.5T to U.S. GDP, with total construction spending up 5.6%.

  • Seeing connections: The Kansas City Fed introduced a helpful new index measuring the relationship between CRE development and the regional economy.

  • Silent sales: Sale price disclosure in nondisclosure states like Texas sparks debate over tax burdens and property values.

  • Taking ownership: An LA healthcare company bought its senior care facility for $23.5M from its landlord, highlighting strong demand.


  • Building delays: In the past 9 years, the time it takes to construct a multifamily building increased to 2+ years due to supply chain issues and pandemic work stoppages.

  • Banking on trouble: NYCB suffered a significant share drop after revealing a larger provision for credit losses than expected and concerns about its multifamily portfolio.

  • Windy City woes: Chicago's multifamily market faces challenges with foreclosures and lawsuits, but insiders argue it's not a plunging market.

  • OC vs. LA: Orange County apartment rents increased by 2.2% last year, while LA County saw a decrease of 2.6%.

  • Diving in: LA-based firm Universe Holdings acquired a 250-unit Pearce at Pavilion in Tampa for $66M in an off-market transaction, eyeing more Florida properties.

🏭 Industrial

  • Warehouse ban: Deerfield, a suburb of Chicago, has unanimously amended its zoning code to ban warehouse and distribution facilities.

  • Fortifying partnerships: High Street Logistics Properties extends a 299.2KSF lease in McCook, IL with Tru Vue, a glazing products manufacturer.

  • Doubling down: Rexford Industrial Realty (REXR) plans to invest in a high-demand industrial region despite pandemic-induced softness.


  • Tale of two leases: A Northmarq report shows a 31.7% QoQ drop in single-tenant net lease investment sales in 4Q23, with an average cap rate of 6.29%.

  • Books and bricks: Barnes & Noble will expand by moving into a historic building on Chicago's North Side, following previous closures.


  • Office lease surge: Renewal rates for existing leases are high, and new leases are primarily for Class A/A+ space, according to a CBRE report analyzing 2023’s top 100 lease signings.

  • Clinical oasis: Indago Research and Health Center bought a Miami Lakes office building for $11.7M, occupying parts of the 59.97KSF space.

  • Taxing times: After three excellent years, declines in Dallas CRE values may significantly impact tax revenues for cities in the area.

  • Cautious outlook: Chicago’s office real estate market is lagging behind other cities in IL, showing little signs of recovery from the pandemic.


Deep-Pocketed Investors Seize Opportunities in CRE Turmoil

Turmoil in the U.S. CRE market has created an opportunity for investors with cash reserves as owners face difficulties extending loans.Β 

Bursting at the seams: Investors have been amassing funds since the pandemic's onset, anticipating a market downturn. Their patience is starting to pay off as soaring interest rates have left many property owners, especially those with floating-rate debts, struggling to meet higher service costs. This financial strain is most evident in sectors like office buildings, hotels, and apartments.

Feeling the heat: Investors with significantliquidity are now actively acquiring these distressed properties or offering rescue capital for preferred returns. Notable players include Ares Management and RXR, which are targeting notable investments in office space and senior debt. Simultaneously, private equity firms have accumulated a record $544 billion in global real-estate funds, primed for opportunistic investments.

On the rise: The distress in CRE is increasing, with financially troubled assets and those taken over by lenders reaching $85.8B by the end of 2023. Analysts predict distress will continue to rise as owners need to refinance over $2.2T in commercial mortgages set to mature by the end of 2027.


Looking forward: The rise in distressed sales offers hope for stabilizing the market and provides an avenue for determining new values. As distressed deals rise, new pricing will emerge. Big players in the industry are getting involved, such as SL Green Realty (SLG), who are planning to raise a $1B opportunistic debt fund. Despite the pain caused by higher rates, available capital from various sources and owner ’ willingness to salvage deals provide some hope.


With almost 50% of American #multifamily renters spending more than 30% of their incomes on rent, many #Midwest cities make the Most Affordable Cities to Rent list (30% or less of the median salary).

Shoutout to Reid Bennett for finding and sharing this chart with us!

What did you think of today's newsletter?

Login or Subscribe to participate in polls.

Join the conversation

or to participate.