Investors are back to buying office bonds after about two years on the sidelines, committing billions to deals that refinance New York City towers even as the future for older, less well-known buildings remains unclear.
From the Seagram Building to the MetLife Building, owners of Manhattan’s trophy offices — prime buildings in desirable locations — have sold a slew of commercial mortgage backed securities in 2025. That builds on momentum from the fourth quarter of last year, when there was a $3.4 billion CMBS sale tied to the Rockefeller Center.
Sales of these bonds were dead for much of the last two years, but this month, investors have paid more than $4.5 billion to buy bonds that were backed entirely by US offices — the highest figure in at least a half-decade. In February, these securities accounted for 35% of single-asset commercial mortgage bonds sold, according to Deutsche Bank, based on three-month trailing averages. That’s the highest percentage since 2021.
Investors have warmed up to the market as supply has increased. Premiums on some riskier portions of the CMBS deals have compressed rapidly, dropping from 325 bps for last year’s Rockefeller deal to below 200 bps for this month’s Seagram Building deal, according to data compiled by Bloomberg News.
But the newfound enthusiasm is mostly limited to the upper crust. There’s much less demand for bonds tied to Class B and Class C properties, the aging no-frills offices that are more functional than fancy, and perhaps off the beaten path, away from major transit hubs. The distaste for debt at that end of the market is pushing up servicing costs and driving defaults and foreclosures.
“The office market is separating into haves and have nots,” said Zachary Aronson, a portfolio manager at MacKay Shields. “Investors are eager to buy bonds backed by newer buildings with lots of amenities while older properties continue to struggle, especially if they’re in less desirable locations.”
The special servicing rate — a barometer of distress — for New York City office-backed mortgage bonds has climbed above 10%, nearly two magnitudes higher than January 2020. In addition, foreclosure rates on office bonds in the Tri-State area rose to 1.86% in February, compared to 0.06% just half a decade ago, according to Bloomberg data.
However, commercial mortgage bond sales tied to top-tier properties around the U.S. have received strong interest. Developer Tishman Speyer’s bond sales for the Rockefeller Center and The Spiral attracted demand that outpaced supply by more than three times and five times, respectively, according to Rob Speyer, the company’s chief executive.
Ed Reardon, a CMBS strategist at Deutsche Bank, said much of the hunger for prime office debt is coming from insurance companies, who are looking for assets to fund future payouts on their annuity products, which have seen record demand due to elevated interest rates. Insurers have been buying into all sorts of credit, especially products that offer higher yields due to extended duration.
Speyer, Tishman’s CEO, said that demand for high-quality CMBS debt surged last summer, which accelerated his firm’s plans on refinancing its Rockefeller Center by nearly a year. That bond sale was immediately followed by The Spiral, he added.
“It was very positive not just for us, but for the office market in general,” he said in a phone interview. “It sent a strong signal to investors that high quality, well located office is open for business.”
Luxury office bond sales are picking up across major US cities. This year, there have been deals tied to Uber’s headquarters in San Francisco and the Texas Tower in Houston. Leasing activity is also stronger in high-end buildings, according to Coldwell Banker Richard Ellis, which said vacancy rates in Philadelphia and Charlotte were about 10% lower in the prime segment than nonprime.
To be sure, the gap between premier and second-tier buildings could narrow as a growing share of workers return to offices, reversing the remote-work trend started during the pandemic. The downsizing rate declined to just under 8% in 2024, according to Jones Lang LaSalle Research.
“Broader segments of the market are beginning to stabilize and experience growth that was previously confined to the narrow high-end segment of the market,” JLL wrote in its final quarterly report of 2024.
“We are seeing the first leg of CMBS investors’ gradual return to buying office,” said Charles Sorrentino, head of investments at Rithm Capital. “They want to be able to easily justify that reentry.” Right now, he said, Class A offerings “with moderate leverage and good structures are the focus.”
Bank analysts expect 2025 to be a big year for private label CMBS issuance, with roughly $174 billion in debt set to mature this year, according to CRED iQ. Strategists at Barclays Plc called for issuance to jump 30% from 2024 to hit $145 billion, while Bank of America Corp. expected between $110 billion and $130 billion. JPMorgan Chase & Co forecasted $135 billion.
