“Office real estate is doomed,” so goes the most common narrative on Wall Street.
Delinquency data could be telling another story; does it indicate that the market is wrong about commercial real estate?
The Data: The Board of Governors of the U.S. Federal Reserve System reported data on commercial real estate loan delinquency quarterly.
In the first quarter of 2024, delinquency rates were 1.16%.
Why it Matters: Delinquency rates are currently at an elevated level; in the first quarter of 2023, delinquency rates were at 0.77%.
Before the COVID-19 pandemic, rates generally hovered between 0.65% and 0.8%. Rates reached an all-time low of 0.64% in the second quarter of 2022.
While today’s rate is relatively high, it comes nowhere near other historic peaks.
During the 2008 recession, delinquency rates reached a high of 8.94% (first quarter of 2010). During the savings and loan crisis of the late 1980s and early 1990s, delinquency hit a peak of 12.1% (first quarter of 1991, the first reported data point.)
The caveat of reasoning that commercial real estate’s woes are overstated may be that owners of commercial real estate are very unlikely to ever be ‘distressed’ in the first place. However, the most recent level is still very low considering all the trauma in the market that many consistently refer to.
Trillions in commercial real estate debt is set to mature in the coming years. Time will tell whether the current office space pessimism will hold as the Fed continues to report delinquency data.
The Real Estate Select Sector SPDR Fund ETF (NYSE:XLRE) is down 4.75% in 2024. On Tuesday, shares are up 1.19% at $38.35.
Also Read: Bond Market Rallies As Recession Worries Mount, Rate Cut Bets Gain Steam Ahead Of Jobs Data
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