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Maturity Extensions Obscures Office Debt-Funding Gap

Feb 6, 2025, 14:45 PM by Michael Leahy

Our December 2022 debt-funding analysis noted a substantial gap between outstanding debt backing office properties and the new financing available when current loans mature. Our analysis was updated in June 2023 and October 2023 to reflect shifts in cap rates and property value forecasts.

Large-scale lender forbearance – including loan extensions – over the past two years has made it difficult to estimate the size of the current debt-funding gap. Nevertheless, the chart below provides an estimate of the debt-funding shortfall for office loans originated from 2017 to 2023 and coming due between 2025 and 2028, using the following methodology:

1.Use the Mortgage Bankers Association Origination Summation report (excluding intermediary lending) to establish the amount of office loans originated in each year.

2.Divide the annual lending volume by the average office LTV at origination to determine the value of the property at that time. The LTVs are calculated using a dataset of loans closed or brokered by CBRE.

3.Use the CBRE EA baseline value index to calculate the hypothetical value of the properties five years after origination.

4.Multiply the five-year future value by an assumed future LTV to determine the level of available debt.

5.Assume these loans were amortized on a 25-year schedule at a 3.5% interest rate. Use this amortization schedule to support our assumption about the percentage of debt outstanding.

6.Subtract the available debt from the assumed outstanding debt. For 2017, 2018 and 2019 vintage loans, we assume the outstanding principal balance was extended and the debt will come due in 2025. The gap from these assumed extensions is reflected in the separate bar in 2025.

Using these assumptions, we estimate a $131 billion funding shortfall over the next four years. This represents nearly a quarter of all office debt originated between 2017 and 2023. Distress remains a supreme challenge in the office sector, particularly for undifferentiated Class B and C properties, as reflected in the 11% CMBS delinquency rate. We expect to see more distressed assets come on the market as lenders grow weary of extending delinquent loans.

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