Sorry to be a joy-kill, but the ratings agency Fitch suggests we should take a grain of salt before reading headlines like: “US Commercial real estate bottoming out!” or “Now’s the time to buy!” Doing my own Google search, I found headlines proclaiming the bottom as far back as December 2023 ;-)….Fitch’s own headline was less cheerful: US Commercial Real Estate Office Performance Will Worsen through 2025. “We maintain a ‘deteriorating’ outlook on the U.S. office sector through YE24,” it wrote recently.
“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. 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.” The Fed has said quite clearly that it will keep interest rates higher for longer than it expected. The stock markets have responded by sticking their fingers in their ears. None of this will help owners of real estate who are terrified of impending refinancing negotiations.
“We revised upward our U.S. CMBS office delinquency forecast, to 8.4% and 11% for 2024 and 2025, respectively, from the 8.1% and 9.9% projected at the start of 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.” Fitch notes that between April 2022 and May 2024, office had the lowest refinancing rate of any tracked asset class: 50% compared to the overall average of 73%.
