US Office Market Faces Growing Challenges Amid Rising Rates

America’s office market has faced multiple forecasts of catastrophe in recent years. Yet, despite the pandemic and looming debt deadlines, it has largely defied the worst predictions. Investors feared a collapse in office valuations, but the disaster many expected did not happen. This resilience continued into 2023, even as interest rates rose due to inflation, fueling more concerns about a potential debt crisis in commercial real estate.

This year, a sharp increase in bond yields reshaped expectations concerning inflation and interest rates amid an uncertain fiscal outlook. The possibility of higher borrowing costs destabilizing the commercial real estate market, especially the weaker ‘Class B’ offices outside major urban centers, has grown. These properties have struggled with the ongoing presence of remote work.

This particular segment represents a portion of the broader commercial property market. Distress is more evident here as many borrowers come under financial pressure. A substantial wave of loan maturities looms as debt requires refinancing amid persistently elevated interest rates. This scenario could result in a surge of defaults, leading to properties being returned to lenders and prices potentially plummeting by as much as 40%, according to real estate experts cited by Business Insider.

Lonnie Hendry, from the CRE market intelligence firm Trepp, noted that higher borrowing costs have nearly driven the US office market to ‘peak distress.’ The delinquency rate on commercial mortgage-backed securities related to office loans has remained around 12% for around ten months, a significant rise compared to a 2.5% peak in 2021.

Defaults on office CMBS loans remain high after hitting a peak in 2025. Trepp data shows the balance of newly defaulted office loans reached $6.8 billion in the first nine months of the year, approaching last year’s figure of $10.5 billion. MSCI estimates suggest over 20% of offices with loans maturing in the latter half of 2026 are ‘underwater,’ with loans exceeding property values.

Trepp’s Property Price Index indicates commercial real estate valuations have fallen nearly 16% since late 2021. As commercial mortgages are priced over Treasurys, distress has coincided with higher yields this year. The benchmark 10-year US Treasury yield nears 5%, an increase of 67 basis points since January.

Rob Koonin, of Polsinelli’s New York real estate practice, suggested it might take up to a year for higher rates to impact office valuations fully. Some ‘Class B’ buildings could see declines up to 10%. Hendry foresees the most affected buildings facing declines up to 40%, dependent on specific market conditions. Trepp’s Hendry expressed, ‘These issues stem from economic calculations that no longer add up, requiring additional equity for refinancing.’

Owners previously clung to hopes of extending loans with more favorable conditions later, a tactic known as ‘extend and pretend.’ However, Hendry pointed out that lenders now adopt a stricter stance. Rising rates mean that future income is worth less, reducing incentives to extend loans. Lenders must decide whether to invest to increase property value or sell at a discount.

Lenders face a tough choice—the loan may no longer be viable. Around $22 billion in office CMBS loans will reach maturity by 2027. MSCI foresees over $310 billion in US commercial real estate loans maturing in the second half of this year. About half originated in 2021 during low borrowing costs amid the pandemic.

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Last year, distressed office sales jumped 53%, reaching $5.2 billion through bankruptcy auctions and other proceedings. Hendry indicated market stabilization is likely once office prices correct, leading to increased deal activity and occupancy.

Until stabilization occurs, the search continues for those willing to take on losses, as Hendry stated, ‘Someone must bear the loss.’