Office Loan Distress Grows as Hotel and Data Center REITs Surge

A market with two very different stories

Asking which real estate investments are hot and which are cold gets an unusually clear answer in autumn 2026. Properties tied to travel, computing and an aging population are doing well. Office, and the loans behind office buildings, is still the weakest part of commercial property. The gap between the two shows up in REIT returns, in the debt markets and in how public investors are pricing the sector. Taken together, the data points to one conclusion: real estate is not one market moving together. It is a set of separate businesses, and their results are drifting further apart.

Overall, listed real estate has held up better than higher interest rates would suggest. The FFTSE Nareit All Equity REITs Index returned 7.9% for the year through Sept. 30, even though it fell 5.7% in September alone and the 10-year Treasury yield rose.17 A separate tally that weights each REIT equally found an average total return of 9.67% through August. That is more than 10 percentage points better than the same stretch of 2025.18 Those totals hide how far apart the individual property types are.

The hot list: hotels, malls, data centers and senior housing

The biggest gains are in property types many investors had given up on. Nareit's sector data shows lodging and resort REITs up 39.33% for the year as of early October.12 Another breakdown through August had malls up 33.31% and hotels up 29.52%, the two best of 18 property types.18 Hotel, data center and senior housing REITs have all posted double-digit gains in 2026.17

The largest companies show the same pattern. Equinix, the data center operator, was up about 34% for the year in early October. Senior housing and healthcare landlord Welltower was up more than 21%, and Digital Realty was up about 15.5%.20 The appetite for computing infrastructure is wide but uneven. Blackstone's digital infrastructure trust went public in May 2026 and has traded poorly so far, which shows that investors are paying up for established operators rather than for any data center story.13

Investors are paying a premium for that growth. Data center REITs trade at about 27.5 times expected 2026 funds from operations, the highest multiple of any REIT property type.19 Yields on the leading names are below 3%.13 Private-market surveys tell the same story: data centers and senior housing are attracting institutional money because demand for them looks durable.21

The cold list: office, and an apartment puzzle

Office is at the other end. Office REITs trade at about 8.1 times FFO, the lowest multiple of any property type.19 Their median implied cap rate is 10.7%, double digits alongside hotels.18 Four of the ten REITs with the highest implied cap rates own offices: Empire State Realty Trust, Brandywine, Office Properties Income Trust and Piedmont.18

The performance figures don't agree, depending on how the group is defined. Nareit's office index showed a 3.00% gain for the year as of Oct. 2 but a loss of almost 11% over the past 12 months.12 Yahoo Finance's REIT–Office category, which includes a different set of companies, showed a loss of about 11% for the year.20 The likeliest explanation is index makeup and timing. Either way, office stocks have not recovered.

Apartments are harder to read. Multifamily REITs have struggled with too much new supply and softer rents.17 Even so, CBRE's 2026 survey found U.S. investors still rank multifamily as their top choice, with industrial second.21 Consolidation is moving ahead: in May, AvalonBay and Equity Residential agreed to a merger of equals that would create a REIT worth about $69 billion with more than 180,000 apartments.11 In practice, private investors are betting that today's supply glut will pass, while public markets are pricing the pain happening now.

The loan market is where office stress is clearest

Share prices reflect sentiment. Loan data shows who is actually failing to pay. On that measure, office is at or close to its worst on record.

Trepp's office CMBS delinquency rate reached 12.2% in September. That is the second-highest reading ever, behind only January 2026's 12.3%, and 1.5 percentage points above the worst point of the financial crisis.10 The rate was 12.0% in August, which means it is climbing again after a period of holding steady.2

Other data providers report even higher figures because they measure differently. CRED iQ put office CMBS delinquency at 13.2% in August, the highest since at least 2019 and about 1.6 times the 8.2% rate across all property types.3 That number includes loans that have passed maturity but are still paying interest. Without them, CRED iQ's figure falls to 9.8%.7 DBRS Morningstar's August analysis was the highest of the three, at 14.87%.6 The numbers differ, but every source shows office distress at historic levels and worsening, not stabilizing.

The early indicators look bad too. CRED iQ found the office special servicing rate at 15.7% in August, a record. Early September reports were running above 16%.7 Loans held in conduit deals, which pool many smaller loans, are in the worst shape: 14.4% are delinquent and 18.5% are with special servicers.3

Why buildings that earn income still default

The central problem is refinancing, not empty buildings. Most new office delinquencies are maturity defaults. The buildings still produce income, but the borrowers can't refinance at today's higher rates, especially loans written during the easy-lending years of 2018 to 2021.8 Lenders who once extended loans to avoid write-downs, a practice often called "extend and pretend," appear to be running out of patience.4

A fully leased building is no guarantee. Crossroads III in Sunnyvale carries a $209 million loan, and Apple is its largest tenant. The loan was extended once, moved to special servicing in August and received a notice of default on Sept. 1.3 In Hollywood, a $1.1 billion loan backed by Class A office towers and film studios went into maturity default in September after being transferred to special servicing in July.10 A $470 million loan on downtown Houston offices was another major contributor to the higher delinquency rate.4

Transfers to special servicing are a strong warning sign. CRED iQ followed 93 office loans that moved to special servicers while still current and before maturity. Within roughly two years, 72% went at least 60 days delinquent or matured without paying off.3 Smaller loans did worse: among loans under $100 million, 74% defaulted at some point.3

Losses are now being realized, not just reported. Bank of America Plaza in downtown St. Louis sold for $96 million, leaving the CMBS trust that held its mortgage with a loss of about $39.1 million.5 Across the whole CMBS market, Trepp counted $48.65 billion of loans more than 30 days late in September. That is 8.02% of the universe it tracks.5

Where the opportunity might be

Some analysts see value in the gap between public and private prices. Nareit's second-quarter comparison found REIT implied cap rates higher than private appraisal cap rates in every major property type. Office had the widest gap, at 194 basis points.14 Office REITs also reported occupancy 6.9 percentage points above comparable private funds, which suggests listed owners hold better buildings than their share prices imply.14 Average office REIT occupancy was about 90.7% in the second quarter, almost unchanged from late 2025.15

Morningstar is following that logic with selected office names. It sees BXP trading 33% below its fair value estimate and Kilroy Realty about 32% below.16 The firm also notes that office use is still only around half to 55% of pre-pandemic levels, and that Kilroy reported vacancy of 27.5% in Los Angeles and 24.7% in San Francisco.16 Some lenders are still willing to finance the best buildings: JPMorgan-led underwriters are preparing a large single-borrower CMBS refinancing for 245 Park Ave. in Midtown Manhattan.5

The bottom line

Our conclusion is that the office downturn has moved from a valuation problem to a credit problem, and the credit stage is not over. The data shows prime, well-leased towers in strong markets refinancing successfully, while older buildings and those financed with conduit loans head into workouts and losses. Cheap office REIT valuations probably reflect that split more than they reflect general panic, so investors need to judge buildings one by one rather than buy the sector as a whole.

At the hot end, the risk runs the other way. With data centers priced at multiples above 27 times, almost no execution problems are priced in.19 Cohen & Steers expects REIT earnings to grow about 9% this year and about 8% in 2027, helped by limited new construction.17 If that holds, the best returns over the next year may come from property types that are out of favor but where new supply has stopped. Office does not qualify yet. Each month of loan data so far points to more defaults before a recovery begins.