The US office sector will worsen through next year, and the recovery will be slower than after the 2008 crisis, Fitch Ratings says

  • Fitch Ratings revised its office delinquency forecast for 2024 and 2025.

  • The sector's recovery will be slower than after the global financial crisis, it said.

  • Maturing office loan refinanceability will reach no more than 16%-21%.

Things are not looking up for the US office sector, with loan performance set to slump even further in 2025, Fitch Ratings said.

After the market significantly underperformed Fitch's year-to-date expectations in May, the rating agency has revised its office delinquency forecast to 8.4% and 11% through this and next year. That's up from projections of 8.1% and 9.9%, respectively.

Driving the fallout are still-elevated interest rates, cooling economic growth, and a stricter lending environment, Fitch wrote on Friday. That's all happening against a broad decline in office demand, as hybrid or fully remote work has become an entrenched norm.

By one estimate, the work-from-home trend could fuel a 30% peak-to-trough price correction for office properties, and vacancy rates have only kept rising, hitting a record high of nearly 14% in May, the National Association of Realtors found.

"The recovery of the office sector will be slower and more drawn out during this cycle than following the global financial crisis and will lead to permanent impairments in property values, weaker performance, and higher loan losses," Fitch wrote on Friday.

Fitch anticipates low refinanceability on maturing office loans through this year, with 16%-21% able to refinance. Already, offices have the lowest refinancing percentage of major property types, the rating agency noted, with the year-to-date refinancing rate hitting 5% in May.

While most loans will remain cash-flow positive in the next two years, lower-quality office properties are more at risk.

"Eighteen out of 44 Fitch-rated office [single asset, single borrower] transactions are Fitch Loans of Concern due to refinance concerns, elevated tenancy rollover, declining occupancies/rents, high concentrations of dark/sublease spaces, limited performance stabilization and deteriorating market fundamentals," the note said.

A looming commercial real estate loan crash has been a persistent worry among analysts and market observers, with $2.1 trillion in debt expected to mature by the end of next year.

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