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ANALYSIS: CRE Survey Respondents Expect More Office Defaults

May 11, 2021, 9:01 AM

In Bloomberg Law’s 2021 Commercial Real Estate Bankruptcy Survey, we asked attorneys which commercial real estate (CRE) property types would see the most defaults in 2021. So far this year, data on delinquent CRE loans show some similarities—and one key difference—when compared with the attorneys’ predictions.

Respondents most often selected retail, hospitality, and office among their top three choices for 2021 defaults. The first two are not surprising, as pandemic-related distress in retail and hospitality has been high-profile in the last several months. Interestingly, an equal percentage of respondents selected office as selected hospitality for one of the top three defaulting property types. Cancellation of office leases and potential vacancies caused by permanent moves to remote work might be behind this choice.

While retail was the most frequently identified property type for defaults, actual delinquency percentages tell a slightly different story. (While delinquency does not necessarily equate to default, loans more than 90 days delinquent indicate economic distress and are at an increased likelihood of default.) Analyzing the percentage of 90-day delinquencies in each CRE property type using Bloomberg Terminal data (<REDQ>) reveals that hospitality and retail are at the top of the list, although the rates for both have decreased somewhat since January. Meanwhile, the office delinquency rate has stayed far below those for retail and hospitality. For example, the highest delinquency rate for office since May 2020 was only 0.72%, in March 2021.

As 2021 continues, delinquencies in hospitality and retail might decline even further as travel and shopping return to pre-pandemic levels and properties experience better cashflow. While office doesn’t show the levels of distress that the survey respondents predicted, this could change as the year progresses, especially if businesses embrace remote work and decide that they won’t need as much office space in the future.

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