Moody’s Reports Higher Interest Rates Driving Down Defeasance

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Moody’s Investors Service, New York, reported commercial mortgage-backed securities defeasance activity tumbled last year to $11.4 billion from $32.2 billion in 2022.

In CMBS, defeasance is the substitution of other securities to replace the real estate collateral. The new securities provide cash flow and pay off the loan at maturity.

“Although mortgage rates began to normalize in late 2023, higher-for-longer rates reduced commercial real estate sales volume and the appeal of refinancing [and defeasance],” Moody’s said (subscription required). “Overall defeasance activity was slightly greater in the first half of 2023, with the highest monthly amount in May at $1.7 billion.”

Moody’s said multifamily lead defeasance activity compared to other commercial sectors. “With about $6.4 billion of defeased loans in 2023, multifamily continued to dominate defeasance, though its volume was down from $21.8 billion in 2022,” the report said. “Meanwhile, among non-multifamily property types, defeasance volume tumbled 52% to $5.0 billion in 2023 from $10.3 billion in 2022.”

Office and retail sector defeasance also fell 58% and 47%, respectively, Moody’s reported.

Loans with less than three years to maturity made up the lion’s share of defeasance last year–nearly 70%. By vintage, 2015 made up the largest share of defeasance volume last year at 26%, followed by 2014-vintage deals at 21%.

The average defeased loan size fell 10% last year to the lowest figure since 2012, Moody’s said. “This decrease was primarily driven by a reduction in defeasance activity among industrial and office properties, which historically have larger defeased loan balances,” the report said, noting only one large loan/single-asset/single-borrower loan fully defeased last year. The approximately $508 million loan came from Citigroup Commercial Mortgage Trust 2019-SMRT.