CMBS Issuance Hits 2021 Highs, Even If Office Health Remains Precarious

Commercial mortgage-backed securities (CMBS) issuance has reached its highest levels since 2021, buoyed by an improving office market. But office market fundamentals remain precarious, with one CRE data firm forecasting delinquency rates will exceed 14 percent by the end of 2025, up from a current rate of 11 percent.  

Moody’s Ratings released a December 2024 outlook that found CMBS issuance would surpass $100 billion by the end of 2024, compared to only $42 billion in CMBS issuance in all of 2023. The single-asset, single-borrower (SASB) market has contributed $67 billion in issuance alone. 

Moreover, Deutsche Bank recently published a report showing non-agency CMBS excess returns are 3.6 percent year-to-date (as of Nov. 8), making 2024 “the best year for CMBS in a decade,” the report noted. 

“Generally, SASB and conduit CMBS are both pretty robust,” said Jason Brooks, a portfolio manager at Janus Henderson, a London-based asset management firm. “Conduit CMBS has migrated into a five-year market, where historically it was a 10-year market, and it has to do with where rates are now, as most likely borrowers would rather lock in for five years and see if rates go lower.” 

Even though everyone agrees CMBS is en fuego, the exact strength of the CMBS market remains open to interpretation.  

Aaron Jodka, director of research, U.S. capital markets at Colliers (CIGI), said Trepp’s year-end CMBS issuance reached $108.2 billion, while Commercial Mortgage Alert’s numbers reached $103 billion. Colliers settled at $105.5 billion in issuance. 

“The point is, there’s continued strong issuance, and the market is eagerly bidding on these bonds, and the pipeline looks pretty full to start the year, as well,” Jodka said.   

Moody’s argued that modest GDP growth (2.7 percent in 2024), steady employment levels, and an improved interest rate climate have “bolstered cash flow for industrial, retail, multifamily,

hospitality and even office to some extent,” helping power CMBS issuance across the board. 

“The CRE cycle we talked about a year ago was about rising rates and falling values, and the cycle has turned: Rates have leveled out, short-term rates are falling, and a lot of CMBS is fixed-rate deals,” said Brian Snow, a senior credit officer at Moody’s Ratings. “The cost of borrowing is a lot cheaper, and investors are getting more comfortable with buying CMBS.”

However, Moody’s argued that office property and loan performances remain at risk due to elevated vacancies and softening rents. Delinquency rates for office CMBS will exceed 14 percent by year-end 2025, up from the current rate of 11 percent, according to Moody’s. 

“For office loans, the combination of hybrid work, higher rates and subordinate debt will likely lead 2025 conduit office delinquency to continue its upward trend, pulling up the total conduit delinquency rate into the 8 percent range from 7.2 percent in November 2025,” according to Moody’s.  

The main culprit of office distress has been the high vacancies across the national office spectrum. 

Yardi Matrix, a CRE data analytics firm, reported this month that national office vacancies sit at 19.4 percent in December 2024. 

However, the vacancies have been concentrated in a minority of office properties. 

In his 2025 investment outlook, John Kerschner, head of U.S. securitized products at Janus Henderson, argued that most vacancies are limited to troubled buildings in specific markets. 

Citing JLL data, Janus Henderson reported that 1 percent of office buildings were responsible for 16 percent of all vacancies, and 10 percent of office buildings were responsible for 60 percent of all vacancies. Less than one-third of all U.S. office buildings account for 90 percent of national office vacancies, with 39 percent of U.S. office buildings carrying no vacant space. 

“Investors are recognizing that vacancies are not uniform across the industry,” wrote Kerschner. “In our view, the bifurcated market sets up well for an active approach, whereby an experienced manager can perform deep research and seek out opportunities in individual buildings that exhibit industry-leading leasing metrics.” 

The bifurcation will eventually pull office revenues down in 2025. 

Moody’s argued that “revenue will grow for most property types, but the office market will see revenue losses as high vacancy levels persist,” mainly due to poorly located buildings that lack tenant amenities or have many upcoming lease maturities. 

But the market remains optimistic about office CMBS heading into 2025. Colliers’ Jodka noted that the October 2024 SASB deal for Tishman Speyer’s Rockefeller Center in New York City hit $3.5 billion, while the firm also closed on a $3 billion CMBS deal for The Spiral office building in Hudson Yards.

“It appears there’s continued momentum, starting in January. Big deals are being priced,” he said. “There’s no sign of momentum slowing.”

Brian Pascus can be reached at bpascus@commercialobserver.com