MBA NewsLink Roundtable: The Top CMBS Issues to Watch in 2025
(Illustration: Miami South Beach stock photo by Aurora Kreativ via Unsplash)
Commercial and multifamily mortgage loan originations increased 59 percent in the third quarter of 2024 compared to a year ago, according to the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.
KBRA’s November 2024 CMBS Trend Watch recently noted, “CMBS new issuance continued at a steady pace in November and is on track to pierce $100 billion, a level only experienced once since the global financial crisis. Year-to-date through November, issuance totaled $95.9 billion for a year-over-year increase of 172.3%.”
Given the notable increase in securitized commercial real estate lending in 2024, MBA Newslink interviewed three CMBS executives to explore their perspective on the industry landscape in the new year. They share analysis covering CMBS issuance, credit ratings, loan originations, loan delinquencies and loan defaults.
MBA Newslink: What factors drive your 2025 CRE securitization issuance forecast?
Lea Overby, Head of CMBS Research at Barclays: CMBS issuance increased markedly in 2024, and we are likewise expecting another sizable increase in 2025, with a 30% increase in private-label issuance and an 18% increase in agency CMBS. Our base case is that CRE lending will increase as transaction activity improves as prices bottom out and underwriting standards continue to loosen. Improved M&A activity in the REIT and private-label CMBS issuers’ generally keeping their higher market share from the bank pullback should also be supportive of issuance. Agency CMBS issuance should increase with overall multifamily originations expected to go up, though credit standards will remain tight.
While we are optimistic that issuance will remain strong in 2025, we think there is risk to the downside, particularly from higher rates. There may also be risk from slower economic growth and increased volatility due to changes in policy. In addition, banks may be more competitive as they benefit from less regulation, although we expect their lending volumes to remain subdued for most of the year. Agency lending may also be more limited under a Trump administration, although significant changes seem unlikely in 2025.
MBA Newslink: What pool composition trends are you observing in the new issue CMBS market?
Nitin Bhasin, Senior Managing Director, Global Head of CMBS at KBRA: After a dismal 2023, the strong growth of issuance in 2024 was propelled by all CRE securitized product types, with the five-year conduit and single borrower (SB) markets, in particular, being the biggest drivers. This was driven by borrowers’ favor for shorter duration financing in the wake of higher interest rates, and CMBS’ ability to competitively lend on and distribute large SB transactions.
In 2024, loans backed by retail properties (and even some malls!) were reembraced by issuers and investors, as an offset to shrinking appetite for office loans. Multifamily properties have also become more prevalent in conduits, owing to the tightening of underwriting standards and reduced lending in the Agency market. Warehouse, logistics and many lodging properties continue to be in favor owing to generally robust fundamentals.
MBA Newslink: How about credit trends?
Nitin Bhasin: Conduit loan leverage held relatively steady year-over-year, at historically low levels. Pool KBRA loan-to-values (KLTVs), which are KBRA’s leverage metrics based on KBRA’s estimate of sustainable net cash flow and stressed cap rates, averaged 89% and 87% in 2024 and 2023, respectively. These are the lowest since the preceding decade, when the KLTV averaged at 98%. KBRA debt service coverage (KDSC) also held steady at a healthy 1.6x over the last couple of years; albeit it is lower than the preceding decade’s average of 2.1x. The lower KDSC is a direct result of higher loan coupons, which averaged 6.8% over the last two years, compared to the historical average of 4.3%. KDSC metrics were also influenced by the shift towards largely full interest-only (IO) loans in pools, versus a mix of amortizing, partial IO, and full IO loans historically. Pools have also been substantially more concentrated recently at an average of 37 and 30 by loan count in 2024 and 2023, respectively, relative to the historical average of 55.
Looking forward to 2025, with the assumption that there will be some additional rate cuts, we expect that leverage will start increasing as loans become less constrained by lenders’ minimum coverage requirements, and lending competition continues to increase. Increasing leverage is traditionally accompanied by amortization, but this may not occur in 2025 as there may not be a natural trigger to facilitate a shift of loan structures back towards amortization. We also expect that office properties will start making a modest comeback as the property-type’s fundamentals start bottoming out and investors become more comfortable with higher quality office assets. The dominance of SB and five-year conduits should remain throughout 2025, although we could start seeing more 10-year transactions if the long-term rates dip.
MBA Newslink: What are you hearing from borrowers and what types of financing are you observing are most likely to transact?
Quentin Fogan, Managing Director, CMBS Origination at Bank of America: The industry has seen increased borrower interest in CMBS financing solutions this year, as evidenced by the sharp uptick in volume across both conduit and SASB originations.
Our market continues to be heavily driven by refinancing requests, with a continued borrower bias towards shorter-term loans, whether that be five-year fixed rate conduit or the SASB space.
Borrowers continue to highlight limited alternatives for CRE financing in today’s market and CMBS has been well positioned to provide a viable financing alternative for borrowers with stabilized cash flowing properties.
MBA Newslink: What trends are you observing with respect to CMBS delinquencies and loss projections? What do you expect in 2025?
Lea Overby: As we anticipated, CMBS delinquencies have risen over the course of 2024, and we expect them to continue to do so in the year ahead. Currently, 30+ day delinquencies sit at 6.3% for conduits, 5.3% for SASBs, and 7.0% for CRE CLOs. Freddie K paper is performing well, with a 0.39% delinquency rate. Increased office defaults, limited default resolutions, and continued problems in refinancing both office and mall loans may pressure delinquencies higher.
We are also keeping an eye on expenses associated with owning CRE, especially across multifamily deals, which can limit net cash flow and lead to higher default rates. On the other hand, an improvement in issuance volume and decreased maturity default risk for both non-office loans and floating-rate SASB loans can benefit performance. Furthermore, floating-rate SASB borrowers may see some decline in debt service payments in the year ahead, as the Fed may cut rates another 50bp in 2025.
As for losses, we estimate that losses will reach into the BBB tranche within CMBS, with 7% to 22% of 2010-13 vintage BBBs taking a hit and reach 43% for the 2014 vintage.
MBA Newslink: What loan performance trends do you see in KBRA’s rated transactions?
Nitin Bhasin: KBRA currently has approximately 7,500 ratings outstanding across almost 700 CRE private-label and Agency securitizations with a balance of nearly $500 billion. Conduit transactions comprise approximately half of this population, with Agency and SB transactions comprising an additional 30%. As of last month, 6% of loans underlying conduit and SBLL transactions were delinquent, with an additional 3% that were current but in special servicing.
Collectively, this 9% “distress rate” in CMBS loans steadily increased throughout 2024, and we expect it to continue increasing in the early part of 2025 before bottoming out later in the year. Unsurprisingly, office and mixed use (which often tends to have an office component) exhibit the highest distress rates of 14.2% and 12%, respectively. Retail and multifamily distress rates are closer to average at 8.5% and 7.7%, respectively, while lodging is faring well at 5.2%, and industrial performing the best at less than a 1% distress rate.
MBA Newslink: Describe office and multifamily loans that are getting done today and what other property type trends are you seeing evolve in structured finance marketplace?
Quentin Fogan: There has been a flight to quality in the office space, where despite the broader headwinds, best-in-class office assets are able to attract top tier tenants at increasingly favorable terms. These same office properties are the majority of what we see being financed in today’s CMBS market. Overall, office is still a smaller percentage of conduit pools today — and we expect that trend to continue. We are seeing an increased amount of office activity in the SASB space and expect to see more of those deals get done for top-tier assets with well-capitalized sponsors.
In the multifamily sector, we’ve seen a welcome pickup in the number of those transactions finding their way into the CMBS market. The ability for CMBS to provide attractive terms, whether that be through last dollar leverage or structure, is attracting more borrowers to the space. This holds true for the broader array of property types as well.
MBA Newslink: How have ratings performed in KBRA’s rated transactions?
Nitin Bhasin: KBRA monitors its outstanding ratings on an ongoing basis. This includes monthly reviews of delinquencies, defeasances, paydowns and losses and at least an annual deeper dive which may include reanalyzing property cash flows, values and loss forecasts. This process resulted in the greatest number of negative rating actions in 2024 at over 700 downgrades, since KBRA started rating CMBS in 2011. One of the main drivers for the 2024 actions is the unprecedented secular shift in office use which accounts for nearly 30% of the collateral backing CMBS. There have been over 150 upgrades in 2024 as well, many of which were in Agency multifamily and single-family rental transactions which benefited from the strength of the Freddie Mac program and strong home prices.
While downgrade activity remains elevated and outpaced upgrades, rating transitions remain in line with KBRA rating transition expectations, as the vast majority of the downgrades were lower-rated securities. The KBRA Stability Ratio (KSR) – which represents the percentage of ratings in each rating category that are the same or higher than the original ratings – is 99% at AAA across the last 14 years, since KBRA started rating CMBS. The lifetime BBB stability ratio is 82%, while the below investment grade categories have, as expected, lower stability ratios of 69% (BB category) and 64% (B category).
Looking forward, given the volume of loans maturing in 2025, particularly in the office sector, we expect downgrade activity to remain elevated relative to positive actions.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
