by Calculated Risk on 7/11/2025 03:55:00 PM
From Nick Villa at Moody’s The Office Sector’s Double Whammy
The ongoing challenges affecting the office sector have not only resulted in deteriorating space market fundamentals—evidenced by the record-high national office vacancy rate in the second quarter of 2025—but have also had a direct negative impact on capital market activities, including the performance of commercial mortgage-backed securities (CMBS). Figure 1 illustrates the office sector’s “double whammy”—in particular, record-high vacancy rates and CMBS conduit delinquency rates. Specifically, the chart benchmarks the cumulative change in each of these metrics going back to the end of 2019. While the U.S. office vacancy rate has increased by nearly four percentage points over this period, the rise in office-backed CMBS delinquency has been significantly higher at around 11 percentage points.
As one would expect, vacancy rates have slowly inched higher from weaker tenant demand and new supply entering the market, while the long-term nature of most office leases has helped delay the full impact on net operating income. Consequently, this has temporarily masked the underlying CMBS distress, which has recently become more apparent through rising loan delinquencies and declining property valuations. For example, the office-backed CMBS delinquency rate increased by approximately 600 basis points in 2024, which was the fastest annual increase on record since data collection began in 2000. In other words, 2024’s full-year delinquency spike even outpaced levels seen during the Global Financial Crisis (GFC). Concerningly, however, the first six months of 2025 reflected the fastest midyear increase on record, underscoring the unique structural challenges now facing the sector.
The second graph shows the office vacancy rate over time.
Moody’s Analytics reported that the office vacancy rate was at 20.7% in Q2 2025, up from 20.4% in Q1 2025, and up from 20.1% in Q2 2024.
This is the highest vacancy rate on record and is above the 19.3% peak during the S&L crisis.
