Fitch Warns of Catastrophic Office Real Estate Collapse, Eclipsing 2008 Financial Crisis, Hundreds of Banks at Risk

The commercial real estate market is facing a potential catastrophe, with office values plummeting and delinquency rates soaring.

According to Capital Economics, commercial properties could see another 10% decline this year alone.

Fitch Ratings warns that the drop in US office values may even surpass the devastating fallout of the 2008 financial crisis.

Office values have already plunged an estimated 35% in this cycle.

While this figure is still below the staggering 47% drop experienced during the last major financial crisis, there are no signs of the descent slowing down anytime soon.

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Fitch Ratings notes that “in contrast, property values had recovered to roughly 80% of their pre-crisis peak in this same timeframe following the last crash, having regained approximately half of their value declines.”

Several factors contribute to this bleak outlook, including the persistence of remote work trends, challenging refinancing conditions, and substantially higher interest rates.

Fitch anticipates the delinquency rate of commercial real estate loans will skyrocket, surpassing the peak of the last major financial crisis.

The agency predicts that the rate will jump from 3.6% in February to 8.1% this year, and further increase to 9.9% in 2025.

Many property owners are negotiating extensions of their loans past the original maturity date due to falling values and more expensive borrowing costs. However, analysts warn that this may only be postponing an inevitable crash, with a staggering $2.2 trillion wave of commercial real-estate debt set to mature in 2027.

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Goldman Sachs recently stated that the trend of extending and modifying commercial mortgages cannot persist much longer.

Delinquent loans are increasingly making up a larger portion of collateralized loan obligations (CLOs), an investment product that groups riskier commercial real-estate debt. In the 12 months leading up to January, CLO distress soared by an astonishing 440%.