Office REITs Rally as Office CMBS Delinquencies Near a Record

Two markets, two verdicts

In late August, a Forbes contributor made the case that commercial real estate investing takes both science and art. The science is financial modeling, market analysis, debt structure and risk assessment. The art is judgment, relationships and timing, the things a spreadsheet can't hold.21 The piece also warned that a financial model can be bent to support almost any conclusion through its assumptions about rent growth, vacancy, financing costs or exit pricing.21

That may sound like a generic lesson, but the office market this autumn puts it to a hard test. Stock investors are bidding up the best office landlords. Meanwhile, the debt backing office buildings is going bad at a rate rarely seen before. Both signals are real. They describe different buildings, different loan vintages and different capital structures. Telling them apart is the skill the Forbes essay was describing.

The equity case: scarcity at the top

The bullish argument starts with supply. Only about 19.7 million square feet of office space is under construction nationwide, which gives owners of the best buildings pricing power they haven't had in years.1 Manhattan is leading the recovery, with startups, AI firms and large employers competing for the same trophy towers. Office visits rose 6% year over year in the first half of 2026.7

Company results have backed up some of that story. SL Green reported a second-quarter loss of 38 cents per share, well short of the 59-cent loss analysts expected, while revenue rose 16.5% from a year earlier.7 The stock was up about 11% for the year at last report.7 Hudson Pacific signed a 502,000-square-foot lease with the City of San Francisco in June, the city's largest office lease since 2018.7 Wall Street hasn't fully bought in, though. SL Green carries a consensus Hold rating, and short interest is close to 16.9% of the float.1

Broader data points the same way. Cushman & Wakefield reported that office REIT same-store net operating income turned positive in the first quarter for the first time in nine quarters, at 1.1% year-over-year growth.6 Rolling four-quarter office absorption reached 14.3 million square feet, the strongest since 2020 and the seventh straight quarter of improvement.6 The firm also found that office properties bought after 2022 have earned income returns 100 to 120 basis points above older office holdings, and 200 to 300 basis points above recently bought apartment and industrial assets.6 Those newer office owners are spending more on renovations, about 0.9% of market value versus 0.3% to 0.4% for apartments and industrial, but not enough to wipe out the gap.6

Some investors outside the U.S. agree. Bloomberg reported that Allan Gray Australia is favoring beaten-down office landlords, arguing that the market is overestimating how much AI will cut demand for office space.3

The credit case: the maturity wall arrives

The debt market looks very different. Trepp's office CMBS delinquency rate (the share of office loans in commercial mortgage-backed securities that are behind on payments) reached 12.2% in September. That is the second-highest reading on record, just behind January's 12.3%, and above the financial-crisis peak of 10.7%.1315 The rate was 12.0% in August, when office was again the most distressed property type as several large assets failed to refinance at maturity.18

Other data providers report even higher numbers, and the difference comes down to method. CRED iQ put office CMBS delinquency at 13.2% in August, the highest since at least 2019. Its figure counts loans that are past maturity but still paying interest; without those, the rate is 9.8%.12 Morningstar DBRS reported an office delinquency rate of 14.87% for August.14 The figures differ, but every tracker shows the same thing: office debt distress is at or near the highest levels in the modern data, and it is not easing.

The main problem is refinancing, not tenants missing rent. CRED iQ found that 71% of distressed office loan balances are tied to a failed or upcoming refinancing rather than missed payments.12 In Trepp's August data, loans that hit maturity without being paid off made up 81% of newly delinquent balances.18 Many of these loans were written at about 3% in 2020 and 2021 and now face refinancing at roughly twice that rate.20

It is also catching buildings that look healthy. The Crossroads III loan in Sunnyvale, a $209 million loan on a fully leased property whose largest tenant is Apple, was extended once, moved to special servicing in August and got a default notice on September 1.12 Special servicers manage loans in trouble on behalf of bondholders, and they are stepping in earlier. CRED iQ found that 51% of office loans transferred to special servicing over the past year were still current when they moved, typically about 11 months before maturity.12 Of the 93 loans that transferred while current between August 2024 and August 2025, 72% later went at least 60 days delinquent or matured without paying off.19 The office special servicing rate hit 15.7%, with early September reports above 16%.19

The end of extend-and-pretend

For years, lenders often chose to extend troubled loans rather than take losses. That habit is fading, though unevenly. Colliers reports that lenders are increasingly unwilling to extend troubled loans. At Chicago's Aon Center, the special servicer "unequivocally denied" the owner's request for a three-year extension.16 A $470 million loan on downtown Houston office properties missed its final extended maturity, which made it a major contributor to the September increase.17

Extensions still happen when sponsors put in new money. A $1.1 billion Hollywood loan held by Blackstone Property Partners and Hudson Pacific, backed by five Class A towers and three film-studio properties, went into maturity default in September. It was then modified with a 14-month extension to November 2027 at its existing 4.435% fixed rate. In return, the borrowers agreed to fund a $20 million leasing reserve from outside the property's cash flow.15 Loan size seems to matter a lot. Among current-at-transfer loans under $100 million, 74% later defaulted and only 11% had returned to normal servicing. For loans of $100 million or more, the default rate was 63%, and about a third had gone back to normal servicing.12

The Hollywood loan shows how both narratives can be true at once. Hudson Pacific is a stock pick for the rebound and a borrower in a defaulted loan in the same quarter.715

Reconciling the signals

The best way to fit these facts together is that the office market has split in two, and each market is pricing its own half correctly. Bond investors already treat the halves differently. BXP holds a BBB+ investment-grade rating with a stable outlook, while SL Green is rated high-yield. Class B offices in secondary markets remain under pressure.4 Office REITs offered dividend yields of about 4.45% in mid-September, above industrial and residential REITs.8 That premium reflects leasing and refinancing risk.5

The overall REIT backdrop helps the stronger names. Equity REITs posted record funds from operations of $22.4 billion in the second quarter, up 12.4%, with occupancy at 93.8% and an implied cap rate of 5.7%.5 The FTSE Nareit All Equity REITs index was up 7.9% through September 30, despite a 5.7% drop in September and higher Treasury yields.10 Cohen & Steers expects REIT earnings to grow about 9% in 2026.10 Even so, with the 10-year Treasury near 4.8%, the average REIT cap rate sits only about a point above the risk-free rate. That is a thin cushion.5

The next 12 months are a real test. About $39 billion of office CMBS comes due in that period. Of that, $13.9 billion is not yet distressed but already shows warning signs, including 3 Bryant Park ($1.13 billion, put on a watchlist in May) and 280 Park Avenue ($1.08 billion, with income covering only 0.72 times its debt payments).12 Both are Manhattan addresses, the same market that is driving the equity rally. Any of them reaching special servicing would show that a strong location doesn't protect against a capital structure built for 3% money.

The analytical takeaway

The Forbes argument holds up here, with one change. In today's office market, the "art" is less about spotting a neighborhood that's improving and more about figuring out whose debt was written for a world that no longer exists.21 Both sides of the market are acting rationally. One is pricing scarce trophy space, and the other is pricing the cost of refinancing at today's rates. The risk is in assuming that one side's verdict applies to the other.

One sign of where things are heading: Colliers' preliminary third-quarter data show more than one in three owner-user office purchases went to an existing tenant, up from fewer than one in ten in the second half of 2025.16 As forced sales push prices down, tenants who know their buildings best are buying them. Investors wondering whether office has bottomed should watch those buyers.