Office Vacancy Rate Hits Record High Amid Double Whammy Challenges

The US office vacancy rate reached a record high of 20.7% in Q2 2025, up from 20.1% in Q2 2024. The ongoing challenges affecting the office sector have also had a direct negative impact on capital market activities, including commercial mortgage-backed securities (CMBS), with the office-backed CMBS delinquency rate increasing by approximately 600 basis points in 2024, the fastest annual increase on record since 2000.

The U.S. office vacancy rate reached a record high of 20.7% in Q2 2025, up from 20.1% in Q2 2024 [1]. This ongoing challenge has significantly impacted the office sector and capital market activities, particularly commercial mortgage-backed securities (CMBS). According to Trepp, the office CMBS delinquency rate soared to 11.08% in June 2025, marking a new record high [1]. This sharp rise, up 49 basis points from May, underscores the volatility in the sector.

The distress in the office market has been building over the past year. Twelve months ago, the delinquency rate stood at 7.55%, climbing to 10.83% six months ago, and rebounding to 10.28% in April and 10.59% in May before reaching its current high [1]. The office market's deteriorating conditions have also affected capital market activities, with the office-backed CMBS delinquency rate increasing by approximately 600 basis points in 2024, the fastest annual increase on record since 2000.

In contrast, other property types such as retail and lodging showed less severe distress. Retail properties had a delinquency rate of 7.06% in June 2025, up from 6.42% a year earlier [1]. Lodging properties posted a delinquency rate of 6.81% in June 2025, with the rate increasing from 6.32% a year ago [1].

Multifamily delinquencies reached 5.91% in June 2025, after registering 6.11% in May, while industrial properties continued to demonstrate resilience, maintaining the lowest delinquency rate among major property types [1]. The overall CMBS delinquency rate edged up to 7.13% in June 2025, a five basis point increase from May [1].

Looking at loan performance more broadly, Trepp found that 91.40% of loans were current in June 2025. The remainder included 0.28% that were 30 days delinquent, 0.39% 60 days delinquent, 0.59% 90 days delinquent, 1.58% classified as performing matured balloon loans, 2.25% as non-performing matured balloon loans, 2.63% in foreclosure, and 0.88% as real estate owned [1].

Trepp attributed June's overall rise in the delinquency rate primarily to a shrinking balance of outstanding loans, rather than a significant increase in delinquent loans. The delinquency balance remained relatively flat, but the total loan balance declined, pushing the percentage higher. About $4.2 billion in loans were cured, while $4.1 billion became newly delinquent, resulting in a modest net improvement of $0.1 billion [1].

However, this trend did not hold for the office or mixed-use sectors. Office properties saw $1 billion in loans cured, but $1.8 billion became newly delinquent, resulting in a net deterioration of $0.8 billion [1]. Mixed-use properties, for which detailed data were not available, experienced $1.6 billion in loans cured and $500 million becoming delinquent, for a net improvement of $1.1 billion [1].

The CMBS private label market continued to demonstrate strength, buoyed by high investor demand. KBRA reported 13 deals priced in June 2025, including 12 single borrower transactions and one conduit, for a total issuance volume of $7.1 billion [2]. The year-to-date issuance through June was up 33.1% compared to the same period last year [2].

The office sector's distress and the rising delinquency rates in CMBS underscore the ongoing challenges in the market. Investors and financial professionals should closely monitor these trends and consider the potential risks associated with the office sector and CMBS.

References:
[1] https://www.globest.com/2025/07/07/office-cmbs-delinquencies-reach-record-high-in-june/
[2] https://www.morningstar.com/news/business-wire/20250707221944/kbra-releases-monthly-cmbs-trend-watch