CMBS Market Musings–Not Out of the Woods?

Andrew Foster

Andrew Foster is Associate Vice President in MBA’s Commercial/Multifamily Group. He is a former Analyst with S&P Global Ratings and Fitch Ratings as well as a regular contributor to MBA NewsLink and MBA Commercial/Multifamily NewsLink. Foster can be reached at or 202-557-2740.  

On a Clear Day, You Can See Defaults 

As the commercial real estate finance market experienced fits and starts last year, no capital source provided more transparency into commercial real estate than CMBS with its monthly investor reporting and credit rating agency coverage creating a window into market performance and challenges for certain retail and hospitality assets.

Unlike during the last recession, the CMBS new issuance market freeze did not stick, and deals resumed coming to market after March and April. Servicers sifted through an unimaginable barrage of borrower requests and seem to have done a good job working with borrowers within the context of the pooling and servicing agreements that guide their actions. Beth Mattson-Tieg notes here, “Per servicing agreements, special servicers are tasked with analyzing different alternatives and choosing the option that maximizes recovery for bond holders. That list of alternatives includes some type of loan restructuring that might range from modifying simple terms to provide flexibility to a more comprehensive restructure, selling the loan or foreclosing on an asset and selling the asset as REO.”

The unknowns of forbearance plan and eviction moratorium end games are substantial; however, at a minimum, market participants are approaching 2021 with eyes wide open to the risks and challenges they may face. A new year, new stimulus and vaccine rollouts beginning in earnest bring hope and an expectation that the market will continue to stabilize and non-agency CMBS lending and issuance will continue to pick up buoyed by tighter spreads.

While a positive trend is noticeable and notable, the direction can change faster than a new year’s resolution can be broken so the optimism is cautious with an acknowledgment of the stress that will slowly work its way through the system. 

It’s Not You, It’s Your Collateral 

The lack of interest in financing certain segments of hospitality and retail alongside the great race amongst different capital sources to fund the chosen asset classes makes it anyone’s game to lose in terms of winning new assignments. The transaction market and price agreement between buyers/sellers that facilitates its smooth functioning will need to return to healthy levels before volume of the whole CRE finance system can truly stabilize though. The $64,000 question is what role will CMBS and other sources of private capital play in financing multifamily as the agencies work with slightly lower 2021 lending caps and greater mission-driven focus on affordable. It is easy to forget given the large size of Fannie Mae and Freddie Mac’s multifamily lending businesses that HUD had a banner year for multifamily production in 2020 as well and their lending partners aren’t going anywhere. 

Distressed Debt Monitor: Dude, Where’s My Discount?

The distress in existing CMBS transactions seems to have perhaps stabilized with the trend of delinquency rates falling; however, impacts of additional lockdowns and how retailers fare in a pandemic holiday season are questions that will drive 2021 to do lists for retail tenants, landlords and lenders. One would think or hope that the “survival of the fittest” concept would apply to going concern hotels and that the worst may be over there. There is certainly no more bad news needed to make the current situation be best described as an existential crisis for some properties and landlords. 

The interest of hedge funds in shorting the market via CMBX trades and would-be distressed buyers lining up well before the show starts will be the 2020 preface to whatever the new year brings. RCA raises insightful point about where CMBS fits in this conversation this cycle when Jim Costello notes, “Anybody trying to implement a successful investment strategy using the distress playbook from the Global Financial Crisis is going to be disappointed. There will be opportunities for sure as the U.S distress cycle progresses to the work-out stage, but the big chunk of problematic loans this time were not originated for the CMBS market. Trying to source distressed deals out of special servicers will overlook most of the opportunities.”

Looking past credit movements, delinquency trends, and distressed opportunities, according to Thompson Knight Real Estate and Banking Partner William O’Connor, we can expect to see another wave of “put-back” litigation. In a recent Commercial Mortgage Alert article on the recent lawsuit filed by a securitization trust against the originator of a troubled hotel loan, O’Connor predicted commercial MBS investors will be less likely to bring class-action suits the way RMBS investors did.

We’re from the Government and We’re Here to Help

This year was filled with government intervention at every level. Perhaps most notable were the Payment Protection Program, the Cares Act & TALF. These efforts have and continue to define how the commercial real estate industry will come out the other side of COVID with real world consequences for how we live, work and play. 

Any additional help from Washington, D.C. will be another important part of the story. A good synopsis of the landscape and proposals discussed this year can be found here in a Congressional Research Service Report entitled COVID-19 and the Future of Commercial Real Estate Finance.

It is far from clear that CMBS borrowers will get a direct line of pandemic assistance from Congress, the Administration or regulators to support their challenged properties. However, support inside the beltway does not end with these institutions. Trade associations with CMBS constituencies have an opportunity to place continued collaboration ahead of competition and work together to ensure positive outcomes. Members and CRE finance businesses broadly deserve nothing less than this type of leadership from their trade associations.