The Commercial Mortgage-Backed Securities (CMBS) market is buckling under the weight of rising delinquencies, painting a troubling picture for the financial landscape. In November 2024, the delinquency rate climbed to 6.40%, marking a 42-basis-point increase from the previous month. This spike signals not just a crack but a deepening fissure in the sector, with banks delaying loss provisions in what appears to be a bid to avoid facing harsh financial realities.
The office sector is ground zero for this crisis. Delinquencies in this category have breached the 10% threshold, now sitting at a staggering 10.38%. This is the highest rate since the darkest days of the Financial Crisis. Alarmingly, office delinquencies now account for 60% of the net increase in delinquent loans. Landlords are grappling with high vacancy rates, plunging property values, and insufficient rent collections, creating a grim reality for an office market that’s been in a depression for two years.
Signs of distress extend beyond the rising delinquency rates. The Trepp CMBS Special Servicing Rate hit 9.53% in November, up 39 basis points, reflecting the growing number of loans in default or near-default. Over the course of 2024, the overall delinquency rate has surged by 275 basis points, with November recording the second-largest monthly jump of the year.
The parallels to previous financial crises are impossible to ignore. The all-time high for CMBS delinquencies, 10.34%, occurred in July 2012 during the aftermath of the Great Financial Crisis. The COVID-19 pandemic’s peak was similarly grim at 10.32% in June 2020. Today’s delinquencies echo those tumultuous periods, underscoring the financial strain that banks and borrowers alike are now facing.
Banks delaying loss provisions—essentially postponing acknowledgment of bad loans—suggests a systemic reluctance to confront the severity of the situation. This approach recalls the early days of the 2008 crisis, where delayed recognition of losses only exacerbated the fallout. The longer banks wait, the harder the reckoning could become.
This rising tide of defaults in the office sector has profound implications for the broader economy. The financial strain on property owners and lenders could cascade into other sectors, amplifying economic instability. As older office tower values continue their nosedive, the question looms: How much longer can this fragile structure hold before the weight of denial and economic reality causes it to collapse entirely?
$CMBS delinquency rates are spiking, but still banks refrain from making adequate provisions for expected credit losses on this or other type of assets that are showing similar signs of distress.
This is why I stressed in the podcast below how keeping an eye on $JPM is… https://t.co/sFO3HyRh4W pic.twitter.com/Rn0RgMXkTw
— JustDario 🏊♂️ (@DarioCpx) December 15, 2024
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