Class B Office Defaults Set to Rise as Rates Hold Above 5%

Borrowers face a 40% valuation drop on troubled buildings as the delinquency rate on office CMBS loans hovers near 12%, five times the 2021 level.

By the Family Office Real Estate Daily Desk·Monday, November 9, 2026·2 min read

Editorial summary of reporting bybusinessinsider.com Our editorial standards →

The answer · checked against businessinsider.com

How severe is the distress in the US Class B office market and how much could valuations fall?

The delinquency rate on office CMBS loans has hovered near 12% for roughly ten months, a five-fold increase from the 2.5% peak in 2021, according to Trepp data. Trepp chief product officer Lonnie Hendry said the most troubled Class B office buildings face valuation declines of up to 40%, while the 10-year Treasury yield has surged 67 basis points since the start of the year, eroding lenders' willingness to extend or modify loans.

Key facts

Trepp data shows the delinquency rate on office CMBS loans has hovered near a peak of 12% for about the last ten months, a five-fold increase from the 2.5% peak delinquency rate in 2021.
Trepp chief product officer Lonnie Hendry said the most troubled office buildings are facing a valuation decline of up to 40%, though the impact will depend on market conditions in each location.
The balance of newly defaulted office CMBS loans reached $6.8 billion in the first nine months of 2026, according to Trepp data, on track to approach last year's $10.5 billion total.
According to an MSCI estimate, more than 20% of offices with loans set to mature in the second half of 2026 are underwater, meaning the mortgage is higher than the property's value.
Around $22 billion of office CMBS loans are reaching final maturity in 2027, according to Trepp data.
Distressed office sales soared 53% last year, with the value of properties auctioned out of bankruptcy, foreclosure, or lender control rising to $5.2 billion, according to MSCI data.

Class B Office Defaults Set to Rise as Rates Hold Above 5% — Image: editorial illustration · Story sourced from businessinsider.com

The delinquency rate on commercial mortgage-backed securities backed by office loans has hovered near 12% for about the last ten months, a five-fold increase from the peak delinquency rate of 2.5% in 2021, according to data from Trepp, a commercial real estate market intelligence firm. Defaults on office CMBS loans remain elevated after peaking in 2025. The balance of newly defaulted office loans reached $6.8 billion in the first nine months of the year, Trepp data shows, on track to land near last year's $10.5 billion.

The benchmark 10-year US Treasury yield is not far from 5%, even after this week's decline. The yield has surged 67 basis points since the beginning of the year. Commercial mortgages are priced over Treasurys, and distress has risen alongside the spike in yields this year. More than 20% of offices with loans set to mature in the second half of 2026 are underwater, meaning the mortgage is higher than the property's value, according to an estimate from MSCI.

Lonnie Hendry, the chief product officer at Trepp, said higher borrowing costs have already pushed the US office market to near peak distress. Trepp's value-weighted Property Price Index, a gauge of commercial real estate valuations, is down nearly 16% since the third quarter of 2021. The most troubled buildings are facing a valuation decline of up to 40%, though the impact will depend on the market conditions in each location, Hendry said.

Rob Koonin, the co-head of Polsinelli's New York real estate practice, said it could take as many as 12 months for the full effect of higher rates to hit office valuations. A 10% decline could be realistic for some Class B buildings, Koonin said. Class B properties are offices outside major metro areas that have struggled as remote work trends persist.

"It will really hurt already fragile borrowers," Koonin said. "So if you already were having difficulty, it's going to push you over the edge."

"These are not just headlines; this is actually just where the math doesn't work, and borrowers are going to have to put in additional equity to try to get their loans refinanced," Hendry said. "I think all of the storm clouds are there, all of the ingredients are there, whatever analogy you want to make. Everything is ripe for the losses to be taken, for these assets to be moved at a discount."

Higher rates make lenders less willing to modify or extend loans without seeing more cash or equity upfront, Hendry said. Around 45% of office loans originated since 2022 are floating-rate, according to an analysis from Cushman & Wakefield. Last year, distressed office sales soared 53%, with more properties being auctioned out of bankruptcy, foreclosure, or lender seizure.

The Deployment Angle

Family Office Real Estate Daily Desk · our analysis, not the source's

This development narrows the entry point for direct ownership of Class B offices and argues against co-GP arrangements with existing sponsors who carry floating-rate debt originated after 2022. A family office evaluating troubled office assets should model the acquisition assuming a 40% discount from 2021 valuations and a stabilized cap rate at least 200 basis points above pre-pandemic norms, given the occupancy risk.

The 12% delinquency rate on office CMBS loans and the $6.8 billion in new defaults through September point to a growing pool of lender-owned properties that will trade at distressed pricing over the next twelve months. A principal with dry powder should target direct purchases from lenders or receivership sales rather than participating in recap equity alongside underwater borrowers, where the existing basis often makes new money subordinate in practice.

For offices with loans maturing in the second half of 2026, the MSCI estimate that more than 20% are underwater means a family office holding senior debt should expect principal impairment or extended timelines. If the position is mezzanine or preferred equity, model a full write-down unless the sponsor commits new equity at the loan-to-value the lender will accept. The 67-basis-point rise in the 10-year Treasury since January makes it unlikely that lenders will extend without meaningful deleveraging.

Avoid any platform capital commitment to a sponsor with a concentrated Class B office book unless the underwriting includes a property-by-property exit plan for assets maturing in 2026 and 2027. The Cushman & Wakefield figure that 45% of post-2022 office loans are floating-rate means many sponsors face immediate debt service stress, and the 53% jump in distressed sales last year signals that lenders have moved past extend-and-pretend. Price in the likelihood that a sponsor will hand keys to lenders rather than inject equity into buildings with occupancy below 70%.

Questions this story answers

01How bad is the office CMBS delinquency rate right now?

Trepp data shows the delinquency rate on office CMBS loans has hovered near a peak of 12% for about the last ten months. That is a five-fold increase from the peak delinquency rate of 2.5% recorded in 2021. Trepp chief product officer Lonnie Hendry described the US office market as near 'peak distress.'

03How much office CMBS debt is coming due in 2027?

Trepp data shows around $22 billion of office CMBS loans are reaching final maturity in 2027. Separately, MSCI estimates that over $310 billion in US commercial real estate loans across all property types are on track to mature in the second half of 2026, with around half of that debt originated in 2021 when borrowing costs were historically low.

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Original reporting

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