- Office CMBS delinquency jumped to 5.6% in May 2024—the biggest monthly spike since 2008.
- Remote work has permanently reduced office space demand, altering long-term CRE fundamentals.
- High interest rates are making office loan refinancing increasingly unfeasible.
- Residential mortgage delinquency remains near historic lows, showing market resilience.
- Las Vegas defies national trends with stable housing demand and limited office distress.
The U.S. real estate market in early 2025 shows big differences. Housing remains strong, but commercial properties, especially office buildings, show widespread weaknesses. Rising commercial real estate delinquency, mainly for office CMBS loans, is worrying financial markets and making people wonder about a possible real estate crash in 2025. Whether you own real estate directly, have REIT stocks, or just want to know if you should buy or sell now, it’s important to understand why this is happening. Let’s look at the numbers, signs, and what they mean for the market.
Surging Office Delinquency: The Hard Numbers
The commercial real estate market changed quickly in May 2024. Trepp data shows that the delinquency rate for office-related commercial mortgage-backed securities (CMBS) went up to 5.6%. This was a jump of 125 basis points in one month. This is the biggest increase in office-related CMBS delinquencies since the problems after the Global Financial Crisis in 2008.
To understand how big this number is, it helps to compare different types of property:
| Property Type | CMBS Delinquency Rate (May 2024) |
|---|---|
| Office | 5.6% |
| Retail | 6.7% |
| Lodging | 4.65% |
| Multifamily | 1.94% |
| Industrial | 0.98% |
Retail has a slightly higher delinquency rate, but economists and analysts are most worried about how fast the office sector is getting worse. In other property types, problems have stopped getting worse or gotten better. But office property CMBS is getting much worse quickly. This makes people more afraid of a widespread commercial real estate delinquency problem.
This change shows a more basic, long-term change. Unlike short periods when things get bad because of normal ups and downs in the economy, the problems in the office sector are caused by lasting changes. People don’t need as much office space. It’s also hard to get new loans for these properties, and property values are falling fast, leading to big losses on paper.
Why Now? What’s Causing the Office Sector Problems
The increase in office CMBS delinquency and its possible part in a bigger commercial real estate problem in 2025 is not just an effect of the COVID-19 pandemic. Instead, it’s the result of several ongoing and related things.
Permanent Shift to Remote Work
People first thought working from home was temporary. But even hybrid models are clearly here to stay. Many large companies, like tech firms and law firms, now need less office space.
The consequence? Less need for rented space, mainly in the main business areas of cities that used to be busy.
By 2024, major cities like San Francisco, New York, and Washington, D.C. reported that over 25% of office space was empty in some parts. Buildings that used to get high rents now have a hard time finding renters. This is cutting down how much money they make and leading to more people not paying loans.
Rising Interest Rates and Harder Refinancing
The Fed’s work to control inflation has caused very fast interest rate increases. This situation is bad for commercial property owners who got loans for buildings when rates were very low. As loans must be paid back, many borrowers face much higher costs to pay back their loans.
Refinancing becomes especially hard when:
- Property values have dropped, making loan-to-value (LTV) ratios worse.
- Net operating income (NOI) no longer supports new debt.
- Lenders are stricter because the industry is having problems.
So, older loans for office buildings that aren’t doing well are not getting paid back more often.
Appraisal Gaps and Negative Equity
Many commercial buildings were worth the most before 2020. But less money coming in and market feelings have cut those values a lot. If a property’s value is now 30–50% less than before the pandemic, borrowers may owe more than the property is worth.
CMBS loans are not flexible. It’s very hard to change the loan terms. This puts property owners in a tough spot and makes it faster for loans to go to special handling and not get paid back.
Residential vs. Commercial: Two Different Markets
While the commercial sector has problems, the U.S. residential housing market is very different. It shows strength, a lack of homes for sale, and steady demand.
Residential mortgage delinquencies were almost the lowest ever in early 2024. This shows how well borrowers are managing payments, even with high interest rates.
Why are they so different?
Structural Housing Shortage
The U.S. has not been building enough homes for over ten years. Things that make it hard to build new homes, like not enough workers, rules about building, and rising costs, mean there aren’t enough homes for the number of people who want them. In popular areas like Phoenix, Las Vegas, and parts of Florida and Texas, this shortage helps keep prices up, even when the economy is uncertain.
Demographics and Migration Patterns
Millennials are now the age when they are most likely to buy homes, and they are still causing demand. At the same time, people are moving more to more affordable cities in the Sunbelt and areas outside cities. These places have more space, good schools, and jobs. This movement of people is causing steady demand in cities that don’t rely much on commercial office buildings.
Locked-in Low Rates
Many homeowners refinanced during the time when many people got new mortgages in 2020–2021. They got fixed rates around 3% or lower. This has led to what economists call the “mortgage rate lock-in effect.” It makes homeowners less likely to move and limits how many homes are for sale.
The result is a housing market with few homes for sale and steady prices, even though mortgage rates are over 6%.
What Is CMBS and Why It Matters
If you don’t work in finance, “CMBS” might sound like just another acronym. But understanding these securities is important for understanding how big the potential problem is.
Overview of CMBS
Commercial Mortgage-Backed Securities group together loans from hundreds of commercial real estate properties—offices, malls, hotels—and put them into bonds that can be traded. Investors buy parts of these pools, hoping to earn a lot of money based on the property payments.
However, CMBS loans are different from loans made by banks in important ways:
- Lack of Flexibility: CMBS loans come with strict rules that make it hard to change the loan terms.
- Special Servicing Transfers: When problems are found, like missed payments or property values falling, the loans go to “special servicers.” They try to make people pay or change the terms.
- Investor Exposure: Because these loans are packaged and sold, risk is spread out. But wrong prices and not judging risk correctly can cause big losses, mainly for the parts of the bonds that promised higher earnings.
As delinquency rises, especially for office properties, more and more of these CMBS deals are being sent for special handling. This clearly shows the loans are in trouble.
Effects of the Office Delinquency Problem
This problem is not just about a few empty buildings. Rising commercial delinquencies slow down parts of the economy that affect many areas:
Impacts on REITs and Investment Funds
Real estate investment trusts (REITs) that people can buy and sell, and which own lots of office properties, have already lost value. This is making property assets worth less and slowing down how fast payments to investors grow. Private real estate funds are saying their properties are worth less. This affects big investors and retirement funds linked to these funds.
Threat to Bank Stability and Lending
CMBS is one way to finance buildings, but traditional banks also have many commercial real estate loans. As delinquencies rise, banks get nervous and may:
- Make it harder to get loans.
- Give less money for new commercial real estate projects.
- Put more money aside for loans that might not be paid back. This means they have less money to lend.
This less lending could make things worse in a cycle, making problems worse in other property types too.
Less Money for Cities
Office buildings in busy city centers often pay a big part of local property taxes. When buildings having problems are worth less, this can cut into this very important money for cities. This affects:
- Public schools
- Infrastructure projects
- Emergency services
- Affordable housing initiatives
For cities already having budget problems, this is a bad trend that could last for years. It depends on how fast property values go up again, if they go up at all.
Las Vegas Real Estate: Why It’s Not the Same Story
Las Vegas is an example of how an area can be strong. This shows that what’s happening across the country isn’t always true for every place.
According to local expert Steve Hawks, “Las Vegas doesn’t have too many office buildings built just hoping for future demand, like you see in cities such as San Francisco or New York.” This shows real differences on the ground in how the local real estate market works.
Local Market Strengths
- Low Office Overbuilding: Developers didn’t build too much, so there isn’t too much supply after the pandemic.
- Strong Residential Market: Over 4,000 homes are selling, and it’s not slowing down. Buyers, many coming from California and the Pacific Northwest, keep the market going strong.
- Demand Comes from Different Areas: Las Vegas is more than just a gambling and tourism economy now. More tech and logistics companies are making the job market more varied and keeping housing demand steady.
This shows something important for investors: don’t just assume things are the same everywhere. Focus on what’s happening in specific areas.
Do We Face a Real Estate Crash in 2025?
The increase in commercial real estate delinquency, especially for office CMBS, is certainly serious. But does this mean a complete real estate crash in 2025?
Analysts say we should be careful before getting too worried.
Key Differences From 2008
- Homeowners can still pay their bills. People aren’t using risky mortgages like before.
- Banks have more money saved up because of rules made after the last crisis.
- People still think owning a home is a good long-term investment.
The current problem is more like a reset for commercial properties. It’s a needed correction in the value of older office buildings, not a total collapse of the U.S. real estate market. Still, investors affected by CMBS and REITs that own lots of office properties may see very big losses. And it could slow down the whole economy if problems spread too much.
Advice for Investors and Homeowners
If you want to make smart choices in this market that has big differences, plan what you do based on these differences:
- Avoid Office-Heavy REIT Exposure: Look for real estate funds that invest in different types of property. They should focus on apartments, healthcare buildings, or industrial properties.
- Distressed Debt Opportunities: Investors willing to take high risks for potentially high rewards might find chances to buy CMBS notes for much less than they are worth. But you need to know a lot about this.
- Stick to Local Data: News about the whole country can’t show where things are strong in specific areas. Check your area’s MLS data and talk to brokers you trust.
- Prepare to Hold: If you buy in strong housing markets, think of this as something you hold for a long time, not something you buy and sell quickly. The basic reasons to own are still good, even with high rates.
What’s Coming Next? Signals to Monitor
To see where things are going through the rest of 2025, watch for:
- CMBS Delinquency Trends: Numbers from Trepp and others really show the risks for specific property types.
- Rate Policy from the Fed: If the Fed decides to lower rates, it could make refinancing easier.
- Big-Ticket Defaults: When big, famous buildings (like towers in major cities) fail, it might mean the worst panic is here. Or it could mean people are giving up and things might get better soon.
Final Takeaway: Steve Hawks’ Local Perspective
For Steve Hawks and other people who watch the Las Vegas market closely, the message is to be hopeful but careful. “Over 4,000 homes are selling, and there are many buyers from outside the state. The Valley’s housing market is doing very well,” Hawks emphasizes.
The news across the country may be full of worry, but how things are in specific areas is different. Instead of being afraid of the news, buyers and investors can focus again on value, things that last, and specific chances. This is mainly in housing markets that are strong and aren’t much affected by the problems in commercial real estate.
Sometimes, the biggest opportunities happen during someone else’s crisis.