KBRA: CMBS Loan Distress Growth Slows, Performance Diverges Across Markets

Kroll Bond Rating Agency, New York, reported commercial mortgage-backed securities loan distress rates have continued to rise, but at a slower pace.

The firm’s latest report, Metro-Level CRE Loan Distress: Bifurcated Performance (subscription required), noted performance increasingly diverges across major U.S. metropolitan areas.

The U.S. private-label CMBS distress rate reached 10.4% in January, up from 9.7% a year earlier, though the pace of increase slowed significantly compared to the prior year.

The moderation reflects improving refinancing conditions and lower borrowing costs as the Federal Reserve shifted toward monetary easing, KBRA said.

KBRA highlighted a growing bifurcation in credit performance across markets, with roughly half of the top 20 MSAs experiencing declining distress rates, while others saw increases or remained flat.

“Performance continues to diverge across markets,” KBRA said. Among major markets, San Francisco (22.6%) and Chicago (21.8%) recorded the highest distress rates, while San Diego (0.4%) and Boston (1.7%) had the lowest.

By property type, office continued to show the highest distress rate at 16.2%, followed by mixed-use (13%) and retail (11.5%), while industrial remained the most resilient at under 1%, reflecting ongoing strength in logistics demand. Office distress remains elevated due to the continued impact of remote and hybrid work trends.

At the market level, performance varied widely. For example, San Francisco’s elevated distress was driven in part by large, troubled assets in the lodging and multifamily sectors, though underlying property fundamentals have shown signs of improvement.

While distress rates remain elevated, improving capital markets conditions and easing monetary policy could help stabilize performance and support refinancing activity in the near term, KBRA noted.