Wider Commercial Mortgage-Backed Securities Spreads Signal Investor Fatigue

While the commercial mortgage-backed securities market has been going gangbusters of late, investors seem to be saying there is such a thing as too much of a good thing. 

“Investors are showing some fatigue, as issuance has been very high,” said Lea Overby, head of U.S. CMBS research at Barclays. 

The weariness is showing up in the form of widening spreads — the difference in the yield rate in those CMBS deals versus Treasury bonds — and signaling reduced liquidity in the market. But, if investors are fatigued by March, there’s a long and active road ahead of them, with Barclays forecasting $110 billion of CMBS single-asset, single-borrower (SASB) issuance this year, which would surpass last year’s $91 billion.

February was an especially active one for CMBS issuance with 13 SASB deals pricing for a total of $12.7 billion, more than double January’s volume, according to Barclays research. However, last month also showed a general widening of the SASB market with AAA spreads underperforming lower-rated securities and broadly syndicated loan collateralized loan obligations (BSL CLOs), which have faced challenges due to exposure to software companies that might be caught in artificial intelligence-related headwinds.

“The SASB market has held in well versus its peers, but it could see more weakness as other risk assets widen,” Overby said, noting that despite some widening seen by CMBS deals in recent weeks, spreads should stabilize compared to BSL CLOs due to CMBS having less exposure to AI. 

The lodging sector accounted for a third of February’s SASB originations as the hotel industry faces challenges from a pullback in domestic travelers and international visits, according to the Barclays report. Nearly all CMBS deals in the SASB market consisted of floating-rate debt despite Barclays projecting an uptick in fixed-rate issuance early this year, according to Overby. 

Fewer refinancings are likely in store for the CMBS market in the near term due to fatigue, but with spreads there remaining “relatively in line” with how they were at the end of 2025, according to Overby. Trepp projected at the beginning of the year more than $130 billion of total CMBS volume in 2026 driven largely by SASB deals, though recent volatility has slowed issuance.

“It remains to be seen if SASB spreads can tighten,” Overby said. “However, I think this has more to do with spreads on competing products, such as CLOs, rather than with investor fatigue. In particular, the SASB market has been driven by refinancings, indicating that the net issuance is much lower.” 

Investors also displayed concerns about the CMBS conduit market following the start of the war in Iran. 

Longer-duration loans in the $1.2 billion, five-year BMARK 2026-V21 securitization were priced 82 basis points (bps) above U.S. Treasurys in early March while the BBB component finished at 550 bps, according to Green Street. The Goldman Sachs-led transaction’s collateral consists of 25.7 percent mixed-use properties, 20.5 percent office, 19.4 percent hotel and 16 percent multifamily.

The $766.7 million, five-year BMO 2026-5C14 conduit deal originated March 6 by a BMO Capital Markets-led lending syndicate also saw spreads widen to 82 basis over Treasurys for the senior debt, according to Green Street. The two 82-point deals contrasted with a low 70 bps range for five-year conduit deals seen before the Iran war started Feb. 28, Green Street data shows. 

David Putro, senior vice president and sector lead at Morningstar Credit Analytics, said any type of geopolitical event often results in more conservative investing. Plus, the hospitality sector has been especially hard hit from rising oil prices due to the war. Putro added that the office market is also facing some heightened concerns about negative effects of AI on office valuations — another contributing factor in the recent widening spreads.

“It’s not one pressure in a market, it’s a confluence of multiple
factors,” Putro said. “There are a lot of external issues that are pushing spreads.”

Total private label CMBS issuance from SASB, conduit and CLOs for 2026 was up 17 percent as of March 17 to $72.4 billion compared to the same period a year ago, according to data from the Commercial Real Estate Finance Council (CREFC). While SASB deals are down around 20 percent from a year ago with conduit volume 2 percent lower, CLOs are up nearly double from where they were last year at this time — around $12.5 billion versus $7.5 billion — underscoring investor demand for high-yield products.  

Investors are giving more scrutiny to CMBS deals, comparing the quality of the collaterals in various transactions given the high volume of securitizations, according to Lisa Pendergast, CEO of CREFC. Pendergast noted that investors she has been in contact with don’t sense a “fatigue” causing weakness to the market, but are being more “discriminating from one deal to the next.”

While deals are taking longer to clear due to market fluctuations, they are still crossing the finish line. To Pendergast, that’s a sign that investor fatigue hasn’t fully set in. She cautioned, though, that overall CMBS volume for 2026 may be slowed given some of the uncertainty permeating from the Iran war and how that will affect interest rates.

“The world’s kind of on fire these days, and I think that has set the tone of cautiousness to not go out there on a limb on anything, whether you’re putting a deal together, closing a loan or buying bonds,” Pendergast said. “Deals are clearing, but investors are not in a super rush to put orders in because of the current market volatility out there. That doesn’t mean they aren’t doing it, but they are waiting until they get closer and are waiting until there is some stability, and then they are putting their order in.”

Pendergast added that investors are conducting more due diligence before executing CMBS deals because of so much uncertainty around what direction prices are going as conflicts in the Middle East rage on. She said investors are generally looking for a mix of property types in deals and are thoroughly reviewing data centers because of the fluidity of AI and how that could reshape the asset class over the next five to 10 years.

Jay Neveloff, chair of the U.S. real estate practice at law firm HSF Kramer, said part of the dynamic that may be contributing to a form of fatigue in the CMBS market is investors finding better opportunities in equity deals compared to debt. Neveloff said the adage of recent years of investing in debt to gain equity returns is not coming to fruition as much anymore because of more competition coupled with increased market instability spurred by the Iran war. 

“The opportunities in equity are there, and then you have a whole bunch of people right now pausing because of what’s going on in the Middle East and what’s going on with the oil prices and what’s going on with the potential impact on cost of living,” Neveloff said. 

“I don’t think it’s generic to CMBS as the tension between CMBS and portfolio [investing] is always going to be there, and some people would rather save the money, and some people don’t want to have the potential brain damage of dealing with a servicer and a special servicer.” 

Despite some of the current instability facing the CRE market from external pressures, Neveloff expects a big overall year for CMBS and portfolio deals from both new transactions and restructurings stemming from loans hitting their maturity dates.

“People need to transact on existing deals, and we’re seeing more new construction than ever before, and we’re seeing new transactions with more office sales,” Neveloff said. “I don’t see anything endemic to CMBS that’s causing a decline, and I think right now a lot of investors are just taking a beat.”

Or a quick nap, if you will. 

Andrew Coen can be reached at acoen@commercialobserver.com.