By Owen Rice & Riley Hillis
We get asked this all the time: With more than one-third of all office space sitting vacant in most cities across the country, how are office buildings managing to stay afloat without going into default?
It’s been more than five years since the onset of the Covid-19 pandemic, and large portions of office space remain empty. Many of these buildings are outdated, poorly located or simply no longer meet the needs of modern tenants in a hybrid-work world. They have little to no chance of being re-leased anytime soon.
According to recent data from Trepp, a leading firm that tracks the performance of commercial real estate loans, delinquency rates for commercial mortgage-backed securities (CMBS) reached 7.13% in June 2025. The office sector is under the most stress, with an 11.08% delinquency rate, the highest since December 2024.
For context, CMBS loans are often used to finance large office buildings. Trepp’s data gives insight into which properties and loans are at risk of default, and is closely followed by lenders, investors and real estate professionals. So why haven’t we seen a bigger wave of foreclosures?
Much of the distressed activity is happening quietly, behind closed doors. Many lenders are working out solutions with borrowers to avoid the messy and very public nature of foreclosure proceedings. In many cases, borrowers are handing back the keys in what’s effectively a “friendly foreclosure” or deed-in-lieu transaction, keeping the default out of the headlines.
Some loans are technically in default, but lenders are reluctant to take back the asset, especially when the outstanding loan balance exceeds the property’s market value. The last thing a bank wants is to inherit a half-empty tower they can’t lease or sell.
We’re already seeing office towers in major cities lose significant value, with some trading hands below the cost of construction. But that’s just the beginning. Many lenders have been granting short-term loan extensions, just as they did during the 2008 financial crisis. The difference this time? Back then, demand for office space eventually returned. Today, the world has changed, and with the widespread adoption of hybrid work, only the most desirable buildings are capturing tenant demand. The “extend and pretend” approach simply doesn’t work in a market this dislocated.
This is a massive market reset, and it’s going to unfold over the next few years. Real estate is cyclical, and demand will return someday, but not until the massive oversupply of office space is brought back into balance with tenant needs. The hard truth is that in nearly every office market, there are buildings where the highest and best use may involve a wrecking ball. While that may sound crass; that’s just the reality.
With a severe housing shortage in most major U.S. cities, repurposing some of these obsolete buildings for residential use could help alleviate pressure on both renters and homeowners.
Meanwhile, there’s a growing pool of opportunistic buyers, investment funds, family offices and private equity firms, sitting on large amounts of dry powder. Many of these groups learned from 2008. They know the best deals are often the ones that never hit the open market. They’re having direct conversations with lenders and special servicers, looking to acquire distressed assets quietly, often just before a foreclosure occurs. As a result, we may not see foreclosure numbers spike the way many expect. That doesn’t mean distress isn’t happening, it is. It’s just being handled differently this time around: more quietly, more strategically and often one-on-one between lenders and buyers.
