Discussions surrounding non-performing loans dominating the Commercial Mortgage-Backed Securities (CMBS) market have intensified. For months, data points have indicated an unfavourable development. The delinquency rate has steadily climbed and is nearing a peak. Delinquencies in office properties reached a historic high of 8.89 per cent in July, with another wave of maturities imminent. The analytics firm Trepp noted that of the USD 65 billion in CMBS loans due to mature by the end of 2026, USD 37 billion are 'hard maturities' with no extension options.
An analysis by data provider PropertyChecker revealed that these 'hard maturities' will hit particularly aggressively in the second half of the year. Approximately 39 per cent of the annual hard maturities are concentrated in the fourth quarter. Although the facts seem clear, there is no consensus on the precise extent of this development. Some players in the commercial real estate sector find comfort in more aggressive loan workout measures and remain optimistic that, apart from a handful of problem loans, everything will turn out well.
Trepp itself noted in a recent report that the maturity wave primarily represents 'specific areas with refinancing pressure'. Others, however, see threatening storm clouds on the horizon, exacerbated by broader economic strains. Mike Haas, founder and CEO of CMBS tracker CRED iQ, stated there is 'nothing systemic to worry about'. He argues the market is healthy and supporting new transaction activity. Mark Silverman, partner and head of the CMBS Special Servicer Team at law firm Troutman Pepper Locke, does not expect the sky to fall, but considers the situation 'pretty close to Chicken Little', as the volume of maturities is too significant to ignore.
Although he does not anticipate a 'terrible tsunami' of problems, he cannot see how the market could collectively navigate this specific maturity wave in 2026. Silverman stated: 'You've got bad underwriting standards on origination, and then you've got market economic issues. These are just going to collapse and happen simultaneously.' Disagreements about the overall health of the CMBS market partly stem from its own diversity, which many describe as a bifurcation. Analysts and experts, such as Liza Crawford, Co-Head of Global Securitized at asset manager TCW Group, have long spoken of this market split, both concerning existing loans and new originations.
Many optimists point to the fact that new loan origination is very active. Trepp recorded USD 76.2 billion in new CMBS originations year-to-date through July, of which USD 58 billion were Single-Asset, Single-Borrower (SASB) loans. Crawford noted that conduit loan originations have largely shifted to SASB. She attributes this change to an attempt to gain more security and control over risks, as well as the need to be agile to capitalise on what many investors perceive as growing opportunities. Even some floating-rate loans, which could prove challenging due to interest rate changes, might achieve a negotiated extension, according to Crawford.
- —Liza Crawford confirmed: 'There are still extension options in the market.'
- —She added: 'There is a better understanding that lower interest rates will not save loans that do not make sense.'
- —Some experts stress that a significant number of loans are due later this year, at a time when interest rates remain elevated and liquidity for refinancing is scarcer.
Pessimists highlight a troubling overlap of problem loans and persistently poor property performance. Loss severities – the percentage of the principal amount lost through liquidation by a special servicer – continue to rise, meaning more transactions are being processed with lower returns. A number of shopping centre loans granted and modified during COVID-19 are also maturing, as David Putro, Head of Commercial Real Estate Analytics at Morningstar Credit Analytics, explained. This could exacerbate the overall distress. Following the slow, steady rise in bank-owned properties, the number of bank modifications for these loans will dry up, according to Haas.
Another bifurcation exists between office and multifamily properties. Return-to-office policies and increased demand for Class B office spaces are supporting office-based CMBS assets in precarious situations. Simultaneously, however, the multifamily sector is struggling with stagnant operating revenues and an increase in costs. Loans originated between 2021 and 2023, based on optimistic rent growth and operating cost projections, have been severely impacted by a shift in multifamily fundamentals and are now under scrutiny. Silverman noted: 'There won't be enough lenders comfortable with refinancings that make sense for many of these deals.'
This is a cautious way of saying that multifamily properties will not necessarily be readily refinancable if the underlying property metrics are not sound. While healthier rent growth, such as an annual increase of 3 per cent, was assumed, these assets have experienced years of stagnant rents, while costs like insurance have exploded. Crawford reported that 24 per cent of 2023 vintage multifamily CMBS are overdue, and approximately 27 per cent are in special servicing. 'Generally, inflation has really crushed these multifamily properties,' Haas said. 'Those with floating-rate loans taken out during record low interest rates are feeling the pain the most.'
The office sector has not escaped its own challenges but is overall in a significantly better state than might have been expected a few years ago, when remote work dominated and vacancies were stubbornly high. Leasing dynamics, particularly in AI-driven San Francisco and a resurgent Manhattan, have steered demand towards Class B properties and mitigated a potential strain on CMBS values in the office segment.
