Commercial Real Estate Reset? A Special Servicing Roundtable

(Downtown Los Angeles stock photo)

Special servicers are often based far from Wall Street, and they generally draw little attention when the economy is growing. Their role involves managing troubled securitized mortgage loans, so their visibility and workloads rise during economic downturns.

Once a recession hits, special servicers help determine the fate of loans secured by offices, shopping malls and apartment buildings when the bets placed on these properties go sour. While the amount of loans in special servicing has not seen a dramatic increase so far, concerns about commercial real estate have escalated.

A recent KBRA CMBS Trend Watch report noted following the Federal Reserve’s tenth consecutive rate hike, the central bank’s tightening policy may be edging closer to a pause. This should contribute positively to a more stable market that is more conducive to loan originations and securitization. However, commercial real estate continues to face headwinds on a number of fronts, including “higher for longer” rates, ongoing asset price discovery amid downward pressure on valuations and concerns about rising defaults–particularly in the office sector. These headwinds will continue to weigh on CMBS private label issuance, which stood at $7.8 billion year-to-date through April, down 79.4% on a year-over-year basis.

Trepp reported on June 1 that the May 2023 overall delinquency rate shot up 53 basis points to 3.62% As property sale transactions and originations stall, MBA NewsLink interviewed two special servicing executives and a CMBS researcher to get their insights on the commercial real estate finance landscape and outlook.

Jenna Unell is a Senior Managing Director and Vice President of Greystone Servicing Company LLC.  She heads the special servicing operations for Greystone in Irving, Texas, and has oversight responsibility for special servicing asset management, portfolio management, as well as the finance, accounting and legal groups that support the special servicing division.  She joined Greystone in connection with Greystone’s acquisition of C-III Asset Management LLC as of January 1, 2020. Prior to Greystone’s acquisition she served as General Counsel to C-III Asset Management and has served as part of the executive leadership for 20 years. Greystone is the #1 FHA Multifamily and Healthcare Lender, a title it has held for six consecutive years and is a top 10 Fannie Mae DUS and Freddie Mac Optigo Lender. Greystone has a total loan servicing portfolio of $89.3B.

Alan Williams is Senior Vice President at KeyBank Real Estate Capital responsible for special servicing, transactions underwriting and client relations. Most recently he was responsible for business development and client relations where he has led the growth of KeyBank’s named special servicing portfolio from $40B to over $200B. Prior roles at KeyBank include Chief Underwriter of Capital Markets overseeing a team responsible for underwriting and placement of $2.5 billion annually in newly originated CMBS, CLO, Agency and institutional debt products for third-party accounts as well as a variety of positions within Loan Servicing and Asset Management, most notably, his management role in Special Servicing overseeing a team responsible for CMBS and FDIC assets.

Chong Sin is an Executive Director and head of CMBS research at J.P. Morgan. In this role, he regularly publishes to and advises a wide audience of J.P. Morgan’s clients, including portfolio managers, analysts and executives on various CRE and CMBS-related topics. Prior to joining CMBS research in 2014, he was an analyst on the Short-Term Fixed Income and Municipals Markets research teams at J.P. Morgan. Before joining J.P. Morgan, he spent some time at GE Capital and Bear Stearns.

MBA NewsLink: What issues are currently driving investor decision making and preferences?

Chong Sin

Chong Sin, J.P. Morgan: The structural headwinds in the office sector remain the top concern for investors. Office exposures are substantial in the private-label CMBS market at about 28% of outstanding. Even as most investors understand that not all that 28% is problematic from a credit standpoint, risk managing existing positions remains quite a challenge given all the sector-specific but also macroeconomic uncertainties.

In addition, the rapid rise in interest rates over the past year and the consequent increase in borrowing rates is leading to cap rates broadly (not just office) moving higher (values falling), causing concerns over whether borrowers will be able to refinance upcoming loan maturities. Higher interest rates affect all commercial real estate, but most commercial real estate should enjoy durable rent growth in the near-to-medium term.

Office is unique because it is facing a structural demand problem where occupancies and rents are expected to decline over a longer time horizon with some share of the market facing functional obsolescence.

There is about $153 billion of private label CMBS loans ($35 billion office loans) outstanding that is scheduled to mature this year. About 78% or $120 billion is floating rate. These floating-rate loans have seen debt service double or more over the past year and many are under 1x DSCR on an uncapped basis. Floating-rate loans and more specifically office floaters are most near-term challenged and are likely where the most ‘walk-away’ risks lay.

Many office floaters are acutely asset-liability mismatched with deteriorating asset side fundamentals paired against high debt service burden that will only become more burdensome when interest rate caps expire. For these borrowers, the decision to not only invest funds into the property (TI/LC, capex) but to fund new interest rate cap purchases to exercise optional extensions may be too onerous when considering risk/reward.

These refinancing challenges are leading to increasing defaults in the sector where loans are being transferred to special servicing for workout where resolutions including modifications/extensions or foreclosure/liquidations will be considered. The consensus view is that more modifications/extensions than foreclosure/liquidations are likely in the near-term but how special servicers handle modifications will be key in determining the path of investor confidence going forward. A fair and balanced approach will be viewed positively by the investor community.

All these risks have led to considerable spread widening in the CMBS market as investors have de-risked their portfolios. Arguably, a lot of the extension and default risks are in the price by now. We view high quality CMBS as relatively attractive, and many investors agree. The challenge for investors, however, is dealing with the headache of defending their positions in a period where negative headlines dominate, particularly when there are cheap fixed income opportunities away from CMBS without as much risk. Investors are preferring to stay up in the capital stack and staying short duration until there is more clarity on the macroeconomic and fundamental outlook.

MBA NewsLink: How does the world look from your vantage point surveilling your named special servicing portfolio or handling loans that come to special servicing?

Jenna Unell

Jenna Unell, Greystone: Greystone is the named special servicer for a portfolio of loans having a principal balance of approximately $23.7 billion. Our portfolio has very little maturing in 2023 with a significant increase starting in 2024 and peaking in 2026. Given the heightened concern around higher interest rates, bank distress, reduced capital availability and lower occupancy and utilization rates and inflationary pressure particularly affecting the office sector, we have recently undertaken to conduct a more robust analysis of our portfolio to identify risks and better anticipate future defaults with respect to upcoming maturing loans. In applying a refinancing analysis to those maturing loans based on current rates and underwriting standards we have identified significant risks in the portfolio unless the borrower is willing to contribute additional cash to support the collateral. 

In addition, we are watching for large tenant roll before and/or near the end of the term that could impact the ability to pay the current loan and/or impede a refinancing.  We have seen loans transferring into special servicing at a significantly higher rate in 2023 than we did in 2022.  Most of these are maturity defaults.  Anecdotally, we are hearing of tenants downsizing and moving to better quality assets.

MBA NewsLink: How are the SASB transactions performing to date? Which types of transactions is KeyBank special servicing?

Alan Williams

Alan Williams, KeyBank:KeyBank currently has $4.8 billion in active special servicing, which is approximately 2.3% of KeyBank’s named special servicing portfolio. A relatively modest rate when compared to the broader market above 5%.  Office ($2.7 billion), retail ($1.0 billion) and multifamily ($500 million) make up the majority of assets in special servicing.

With KeyBank having a large concentration of floating rate SASB assets within its servicing portfolio, it has seen escalating downward pressure on loan performance. Higher interest rates combined with elevated expenses and increased vacancies, especially in the office portfolio, has obviously resulted in elevated distress.  Borrowers will continue to evaluate all their options and are requesting various types of relief based on their cost of capital and equity positions. The initial borrower ask is normally pretty vast.

MBA NewsLink: Whichtypes of transactions is Greystone special servicing? Have any of these begun to show signs of heightened distress?

Jenna Unell, Greystone: Greystone’s special servicing portfolio consists of CMBS conduit, Freddie Mac SBL, CLOs, and a few SASB and Freddie Mac K Series transactions.  Approximately 76% of the portfolio is conduit.  Our active special servicing portfolio consists of 43 loans having an approximately $1.3 billion balance.  The overall default rate in our portfolio is 5.14% which is greater than the Trepp Industry average of 3.09% for the March 2023 Reporting period.  This is primarily attributable to the remaining legacy transactions in our portfolio.  Retail continues to have the lead in specially serviced loans in our portfolio comprising over 40%.  Office and hospitality are currently 25.05 and 26.22% of the total portfolio, respectively. Multifamily is approximately 5.6%, with industrial being a little under 3%.  The 2023 transfers are consistent with those percentages at 24.3% office and 37.6% retail except that 33.9% of the 2023 transfers by balance were multifamily properties, primarily student housing.

MBA NewsLink: Have any of these begun to show signs of heightened distress?

Jenna Unell, Greystone: Most of our recent transfers are maturity defaults or anticipated defaults due to imminent maturity.  We are seeing major institutional borrowers wanting to “give back the keys” because the property would require a capital infusion to obtain a new loan and/or to re-tenant, and they have determined it is not part of their business plan to continue to support the property because the value is not there.  We are seeing some borrowers asking for extensions and are willing to pay down the loan to put their assets in a better exit position.  These contributions may be structured either as an up-front payment, ongoing cash sweeps or as cash reserve deposits for TI/LC costs or PIPs, depending on the asset’s needs and borrower resources.  We are anticipating a continued uptick in special servicing volume especially for loans collateralized by older, less well-located office properties, and continued difficulties by borrowers to obtain sufficient loan proceeds to pay off their maturing balloon payments in the next 12-18 months.

MBA NewsLink: What are some of the anticipated challenges in your SASB portfolio?

Alan Williams, KeyBank: Not surprisingly, office will continue to be the main concern.  Return to office status remains 50%-60% of pre-covid levels, resulting in office tenants exercising termination options, downsizing space at lease expirations or vacating completely. With the overall softness of the market, tenants have leverage in negotiating attractive lease terms.  Retail was heavily cleansed during the pandemic; however, due to the increased cost of capital there will be more distress.  Some retailers are seeing sales cool as the economy cools. With the slowdown, chain retailers will continue to struggle. We will see more bankruptcy filings like Bed, Bath & Beyond. 

Lodging has seen a strong recovery since the pandemic, but one should pay close attention to deferred funding of property improvements. The requested improvement requirements of the franchisors can be very substantial. 

Multifamily remains relatively strong, but we expect some loans to struggle from poor management and excessive leverage at elevated rates.

MBA NewsLink: How are you tracking the uncertainty in the office sector?

Chong Sin, JP Morgan: Tracking the uncertainty in the office sector is quite challenging considering how many moving parts there are to this problem. Diagnosing the problem starts with an understanding of migration patterns that were in place prior the pandemic in part due to affordability issues in the largest cities but was accelerated by the pandemic with the prevalence of remote and hybrid work. Here, studies show that some of the largest office markets lost a significant amount of population during the pandemic and while the outflows may be abating, quality of life issues may cause outflows to persist. Official studies from the US Census Bureau are likely the most comprehensive source of understanding these population movements but these studies are not frequent and are lagged. Alternative data sources are available and can provide a more current understanding of population movements. These include IRS tax filing data, U.S. postal office address change data, home search data (e.g. Redfin), cell phone mobility trackers, among others.

More specific to office, indicators like the Kastle System’s Back to Work Barometer is a popular measure for tracking the physical utilization of office properties by MSA. I personally like looking at weekday commuter rail ridership data for some of the largest office markets that rely heavily on commuter rail networks. In markets like New York, the commuter rail ridership data and Kastle System’s Back to Work Barometer disagree on the level of return to the office although they agree on direction. In some markets, the data is quite consistent on level and direction. We also began to use cell phone ping data to track return to office foot traffic for the largest CMBS office assets. Other valuable sources for understanding market and submarket trends include data providers like Costar and CRE broker publications. There is no perfect or truly comprehensive dataset for tracking return to office, but investors can use these various sources and others to gauge the relative performance of markets.

Away from the high-level datasets, we are watching news headlines and CMBS loan remit data closely to see how individual assets are performing in the context of their markets/sub-markets. These datapoints help refine our mental model of not only tenant demand within a given market but also how sponsor and lender incentives shape risks for CMBS loans and deals. We update clients via a monthly publication called the Office Market Monitor that tracks some of these metrics on an ongoing basis.

MBA NewsLink: How are investors navigating positions for or against certain office markets and/or properties?
Chong Sin, JP Morgan: As for how investors are positioned, on the long-risk side, cash bonds with high office concentrations are seeing limited demand. In fact, investors have been de-risking by selling riskier bonds. With distressed opportunities likely set to increase in the market, traditional CMBS investors and cross-over investors are doing their credit homework to take advantage of stressed sale situations. On the short-risk side, some investors have been positioning for further deterioration in the office sector through CMBX BBB-s. Generally, some of these investors have been sizing up short-risk positions in the less seasoned BBB- tranches.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to NewsLink Editor Michael Tucker at or Editorial Manager Anneliese Mahoney at