July 2025
CRE Debt Distress Lingers as Office Delinquency Rate Hits New Record
More than five years after the Covid-19 pandemic, billions of commercial real estate debt backed by vacant or obsolete office properties remains distressed or delinquent.
“We see lenders planning out their steps before they execute on step one,”Grusecki said. “The two most important assets are time and information… [and having] a measure of control, that’s driving a lot of decisions and strategic conversations.”
Commercial mortgage delinquency rates increased in the first quarter across all major capital sources, with the delinquency rate highest among commercial mortgage-backed securities loans, at 6.42% — a 0.64 percentage-point increase from the fourth quarter of 2024.
More recently, according to Trepp data, CMBS delinquency reached 7.13% in June, a 5 basis-point increase from the month prior. Perhaps unsurprisingly, the office sector had the highest rate of distress, at 11.08% — a new record high from its previous peak of 11.01% in December 2024.
To be sure, some office towers that’ve seen a significant amount of slashed value since the pandemic have recently sold, usually at basement-bargain pricing. But there’s still a significant amount of distressed debt backed by office towers that haven’t bounced back since the pandemic, and that’s fueling questions about the future of those properties.
Lenders of all stripes and sizes are figuring out the best way to proceed on those distressed commercial real estate loans, with many thus far having issued short-term maturity extensions as a wait-and-see measure.
Lonnie Hendry, chief product officer at Trepp, said during a June 26 webinar hosted by the firm the market remains “super early” in the distress cycle.
“There’s a lot more functionally obsolete Class B buildings than Class A,” he said. “I think we still have some time left before we see the full depths of the distress in the office sector.”
He added that during the Great Recession, peak delinquency didn’t hit until July 2012 — several years after the recession’s technical start.
And tactics that may’ve been effective in dealing with distressed CRE debt pre-2020 largely won’t work anymore, experts say, because of how much the pandemic dislocated the office market.
“Waiting or doing a loan [modification] or a forbearance agreement isn’t going to matter,” said Steven “Sonny” Ginsberg, co-founder and partner at law firm Ginsberg Jacobs. “You can waive a financial covenant or increase the loan rate but you’re not going to collect on it anyway. Those strategies that used to exist just don’t work anymore.”
John Heiberger, president and CEO of commercial real estate services firms Hiffman National and NAI Hiffman, said the overall strength of banks’ balance sheets has given them flexibility when trying to work out loans.
But a moment of reckoning has come for many lenders, especially since it’s been more than five years since the onset of the pandemic, which upended office use and changed how companies view their real estate.
A foreclosure or short sale is commonly pursued. But, depending on the state, foreclosures have very different rules, and in some markets like Chicago and New York — which have no shortage of office towers that’ve seen significant value losses since Covid-19 — a foreclosure proceeding can take years, said Paul Grusecki, managing director and head of advisory services at Hiffman.
Subsequently, lenders are carefully assessing how they want to approach distressed CRE loans and, in some cases, exploring alternatives.
“We see lenders planning out their steps before they execute on step one,”Grusecki said. “The two most important assets are time and information… [and having] a measure of control, that’s driving a lot of decisions and strategic conversations.”
In instances where lenders still want to employ the so-called “extend and pretend” strategy for a loan, lenders should build something into the agreement that can be beneficial to them later, such as an option to get an appraisal at the borrower’s cost, he said.
There were 725 commercial property foreclosures in December 2024, according to Attom Data Solutions — one of the highest numbers in the past decade, although still well below the peak of 1,626 foreclosures in October 2014. Commercial foreclosure activity was up 27% between the end of 2023 and 2024, suggesting lenders have recently become more aggressive in taking possession of distressed assets.
But while lenders are seemingly more motivated now to make a decision on distressed or delinquent loans on commercial properties, so, too, are some owners — so they can be rid of troubled properties, especially as the cost to maintain a building continues to rise and tenant interest in properties considered obsolete remains muted at best.
Grusecki said, in one recent example he heard, a rooftop air-conditioning unit on a building broke, and that served as “the last straw” for the borrower.
“That is something we’re seeing in every capacity and every role in commercial real estate and commercial real estate lending … [the borrower says], I can make it work, I can make it work … this isn’t going to work,” he added.
Many borrowers that’ve already put a lot of equity into an office building are having to come to terms with whether that equity is gone or if they’re willing to put more in, Ginsberg said. He said the uptick in office sales over the past year or so suggests more owners are coming to the conclusion that they aren’t going to put any more money in beyond, perhaps, what they’re obligated to under a guarantee.
Some lenders are pursuing note sales, or the sale of a lender’s interest in a commercial real estate mortgage rather than the property itself. Others are negotiating deeds-in-lieu of foreclosure, in which a borrower transfers the deed to the property to the lender to avoid a foreclosure proceeding.
Note sales aren’t as common because there’s more risk involved, Ginsberg said.
“The note sale tends to be something where a borrower isn’t going to be as cooperative and a lender doesn’t want to go through the process” of a foreclosure, he said. “Maybe they’re a smaller lender and they want to be done, and they’ll sell the note and move on.”
While broader economic factors such as interest rates are still important to monitor, for many delinquent CRE loans, they are less important now, Heiberger said.
“A 50 or 100 basis-point move in the next year isn’t going to save a property,” he said, adding operating expenses, building occupancy and tenant demand are much more important variables these days.
Ginsberg said, for the most part, borrowers and lenders have been largely cooperative in the proceedings he’s seen, because — in most situations — all parties recognize the asset is underperforming because of a broader market collapse, not because of fault by the borrower. Additionally, most lenders don’t want to be in the business of owning real estate, and borrowers — many of whom are coming to terms with the fact that their equity is gone — now want to figure out a liability plan that allows them to move on and “get back to what they like doing,” Ginsberg added.
Plus, so much of the industry is built on relationships, which do still matter, he said.
“A lot of lenders and borrowers are going to deal with each other again,” Ginsberg said. “They understand each other, they talk about where things are going to end up and want to get there quickly.”
About NAI Hiffman:
NAI Hiffman is one of the largest independent commercial real estate services firms in the US, with a primary focus on metropolitan Chicago, and part of the NAI Global network. We provide institutional and private leasing, tenant representation, capital markets, project services, research, and marketing services for owners and occupiers of commercial real estate. To meet our clients’ growing needs outside of our exclusive NAI Hiffman territory, we launched Hiffman National, our dedicated property management division, which provides facility management, accounting, lease administration, lender services and project services across the country. NAI Hiffman | Hiffman National is an award winning company headquartered in suburban Chicago, with more than 275 employees strategically located throughout North America.
About Hiffman National:
Hiffman National is one of the US’s largest independent commercial real estate property management firms, providing institutional and private clients exceptional customized solutions for property management, project management, property accounting, lease administration, marketing, and research. The firm’s comprehensive property management platform and attentive approach to service contribute to successful life-long relationships and client satisfaction. As a nationally bestowed Top Workplace, and recognized CRE award winner, Hiffman National is headquartered in suburban Chicago, with more than 275 employees nationally and an additional six hub locations and 25 satellite offices across North America.
