The commercial real estate market is facing heavy headwinds as the delinquency rate for office mortgages spikes to nearly 12 percent, a number that has not been seen since the 2008 financial collapse.

Office building loans packaged together and sold to investors hit a record-high failure rate of 11.7 percent in August, according to a recent report from a commercial real estate data firm, Trepp.

The findings indicate that more office owners are falling behind on their mortgage payments — at a rate worse than the 2008 financial crisis, when delinquencies peaked at 10.7 percent. The delinquency rate has exploded since December 2022, when it was at 1.6 percent.

A separate report from the Kroll Bond Rating Agency in September showed the overall distress rate for all commercial properties remained at 10.7 percent while the office delinquency rate fell nearly a point to 12.3 percent, though most loans remain in special servicing, indicating they are not yet out of trouble. The distress rate has not been this high since the Covid shock shut down offices, retail outlets, and hotels.

With many people still working from home despite return-to-work orders, offices in big cities across the country are emptier than they were before the pandemic, and with interest rates now higher, it has become more expensive to refinance loans. Many of the balloon loans taken out when rates were lower are now coming due. 

Nonetheless, big business appears to be still investing in office space, Trepp analysts says.

“Based on insights from our experts, we’re not seeing a broad investor pullback,” Trepp’s head of research, Andy Boettcher, tells The New York Sun. “Activity remains focused on institutional players and high-quality office assets in core markets. 

Meanwhile, as office loans are becoming harder to repay, office buildings in major cities are also dropping in value — by as much as 40 percent, according to a report from the Tradeable.

In the Los Angeles area, for instance, the latest appraisal of the 13-story Encino Financial Center reduced the building’s value by almost a third, according to the Real Deal. 

In New York, a trio of commercial condos at 445 Fifth Avenue recently sold for $21.6 million, just more than half of what owners Torchlight Investors paid for the units in 2023. For a variety of reasons, whether because of redevelopment plays or underwater assets, several formerly high-value office properties at Portland, St. Louis, Philadelphia, and elsewhere have been subject to fire sales this past year.

On the upside, one company’s loss could be  another’s opportunity.

“Market repricing is creating opportunities for some investors to step in at discounts,” Trepp’s senior commercial real estate researcher, Thomas Taylor, tells the Sun.