The Future Outlook for Office Property Values: Further Losses Ahead and a Prolonged Recovery
Office property values are facing further losses ahead, with a recovery even longer than after the Global Financial Crisis, according to a recent report from Fitch Ratings. The company predicts that the slide in office values will result in permanent property valuation impairments and higher CMBS loan losses relative to expectations at issuance.
According to Fitch, office values have already declined by about 35% this cycle, based on data from Green Street Advisors U.S. Commercial Property Price Index. However, the company believes that office property values have not yet reached their post-2020 trough, with further declines expected to surpass the drop seen after the Global Financial Crisis, which was a value decrease of 47% from the peak.
The recovery of office values after the 2008 crash took 87 months, or more than seven years, according to CPPI data. However, the post-2020 drop has already lasted four years, and Fitch does not anticipate a quick rebound this time around. Despite a strong economy otherwise, Fitch believes there will not be a surge in demand for office space.
Fitch also projects that the CMBS office delinquency rate, currently at 3.6%, will increase to 8.1% later this year and 9.9% in 2025, surpassing the post-GFC peak. The resolution period for delinquent office-associated CMBS loans has also increased to about four years, indicating that property liquidations and losses for office loans in default could extend through 2028 and beyond.
The median implied capitalization rate for the office sector rose to 11.6% in the fourth quarter of 2023, the highest level in the analysis going back to 2000, according to S&P Global Market Intelligence. This marked a significant increase over previous quarters and years.
Overall, the outlook for office property values remains challenging, with Fitch warning of further losses and delays in recovery. Investors and stakeholders in the commercial real estate market should be prepared for a prolonged period of adjustment and uncertainty in the office sector.
