Payoff Rate for Maturing Office Loans Shows Surprising Improvement

There’s some good early news on office loans. In January and February, the payoff rate for maturing  loans were at 48%, higher than the 35% of 2023 overall.

However, the good is only relative because there is no way to know yet what will happen in ongoing 2024 activity. The current year could be a challenge as, according to Moody’s Analytics CRE. More than $17 billion in office-backed CMBS mature this year. That’s double the amount from 2023.

What the firm includes in that number is all fixed and floating-rate CMBS loans that were still outstanding, not defeased, with a fully extended maturity date in 2024, and originally previously due but extended into 2024.

“The year started off quickly with $1.15 billion of CMBS office debt reaching its fully extended maturity date in January & February, more than the entire first quarter of 2023,” they wrote. “The payoff rates for January and February came in at 55.2% and 25.0%, respectively. By loan count, 30 CMBS office loans have reached maturity in 2024.”

The details of the first two months of 2024 show why the improved payoff rate in the first two months over the full 2023 rate aren’t as representative of going forward as they might seem. In January, there were $857.9 million in office loan maturities. Of those, $473.6 million, or 55.2%, were paid off, while $95.8 million (11.2%) were modified or extended, and $288.5 million (33.6%) defaulted.

February saw about $289.5 million in maturities: $8.2 million (2.8%) was liquidated, $209.1 million (72.2%) defaulted, and $72.4 million (25.0%) was paid off.

The disparities between the two months seems clearly the reason why Moody’s said that it was too early to think that the improvements would necessarily continue.

There’s also been one marked changed between the first two months of 2024 and the same period in 2023. Only 30 loans have matured since January 1, 2024. Of them, loans of less than $10 million had a payoff rate of 56%, or higher than all loans. But in January and February of 2024, the payoff rate in that category was 88%.

And then, there’s this: “The upcoming maturities cover all office loans that, as of 12/31/2023, had a fully extended maturity date between 3/1/2024 and 2/28/2025. The balance of office loans maturing in the next 12 months totals $17.4 billion, of which ~$13 billion or 75% have current performance characteristics that would make them very difficult to refinance, given payoff rate trends we’ve highlighted consistently as ‘make or break’ for many maturing office loans.”

While a bit of good news was nice to hear, there’s a very long distance ahead, and the chance of maintaining an improvement isn’t necessarily realistic.

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