CMBS Remains a Draw in Commercial Real Estate Despite Loan Distress

A longstanding commercial real estate finance drama featuring the codependency between commercial mortgage-backed securities (CMBS) loans and property owners seeking capital through the public markets has fueled a cycle that shows little signs of stopping.

According to CRED iQ’s latest data, $69 billion of CMBS loans are with special servicers as of August 2025. Maturity defaults are the main reason for the increase in defaults in these specially serviced loans, the CRED iQ data shows.  

Special servicing can, whatever the negative headlines, be a starting point for negotiation in the CMBS market, and lenders don’t view this level of distress as a “disqualifier” for new loans, according to David Putro, senior vice president and head of CRE analytics at Morningstar Credit. (After all, while special servicing transfers can occur for imminent default, they can also occur for something simple, like a new lease in the works.)

Putro noted that a number of malls owned by Simon Property Group have entered special servicing with some properties taking losses, but the company has a strong enough reputation as a retail operator to regularly enter the CMBS market. 

The default-to-new-debt cycle is also often enabled by several CMBS borrowers being special purpose entities that own their  properties through different LLC entities for each of their individual assets. 

“If the property and its loan go bad, any resolution is generally limited to the assets of the individual LLCs,” Putro said. “If a loan defaults, there’s no going after the sponsor for restitution.”

Putro said another reason many borrowers with troubled loans can continually access the public debt markets stems from underwriting of these deals being “highly reliant” on property quality and underflying cash flows rather than sponsorship. 

But, there’s no doubt that some of CRE’s top sponsors are active tappers of the CMBS market. 

And, while many commercial real estate borrowers have been drawn to CMBS as a lending vehicle since it was spawned in the late 1990s, accessing the public debt markets has taken on added importance in recent years as banks have become more selective with their balance sheet lending. 

CMBS lending volume rose 150 percent in 2024 with $115 billion of issuance, according to Kroll Bond Rating Agency, after two years of largely muted volume following the Federal Reserve’s aggressive interest rate hikes that took hold in 2022. 

Tishman Speyer ignited much of the CMBS spark last year by securing a $3.5 billion refinance for its Rockefeller Center office complex in Manhattan. Bank of America and Wells Fargo co-originated the largest-ever single-asset, single-borrower (SASB) deal, which drew strong investor demand to close with a fixed interest rate of 6.23 percent after starting off at 6.5 percent.

The new year then began with a bang for CMBS when Tishman Speyer landed a $2.85 billion refi for The Spiral, its new office tower in Manhattan’s Hudson Yards. A consortium led by J.P. Morgan Chase and including Bank of America, Goldman Sachs and Wells Fargo originated the loan.

The size of the loan a borrower needs and the asset type strongly influence when a borrower might seek a CMBS loan, according to Steven Schwartz, head of real estate credit at owner RXR. RXR has several CMBS loans tied to its top properties today, on buildings that include the Helmsley Building at 230 Park Avenue, 237 Park Avenue and Pier 57, according to CRED iQ.  

Schwartz noted that very large loans are done efficiently in the CMBS market, which can also  be more receptive when financing out-of-favor sectors like office as the market continues to recover from pandemic-induced headwinds.

“There are absolutely times when a CMBS loan makes sense,” Schwartz said. “If you have a very large loan, or you want to lock in a low rate for 10 years, or you have a property in a recovering sector like office, CMBS makes sense.”

Risks remain however for CMBS borrowers related to more complex loan modifications and restructurings, according to Schwartz, a former co-head of the CMBS group at J.P. Morgan Chase who joined RXR last fall to scale its lending platform. Schwartz noted that loan modifications in CMBS deals are largely handled by the special servicer who typically has no relationship with the originator of the loan and has to consider the interest of bondholders first.

While borrowers often go the CMBS route because of loan size, a private credit solution would often be preferable, according to Schwartz, since they retain a decision-making ability and can be more creative in helping borrowers navigate changes or challenges to their properties. He said RXR with its private lending platform has worked hard to guide borrowers through the entire lending process even as bumps may arise along the way. 

“As a fully vertically integrated investor and lender, RXR is uniquely positioned to provide creative, flexible solutions to borrowers,” Schwartz said. “It’s really not something a CMBS lender can come close to.”

Michael Cohen, managing partner at CMBS workout specialist Brighton Capital Advisors, said problems can come when borrowers pursue the CMBS market not fully understanding the power bondholders have in the deal and fees associated with loans that get transferred to a special servicer. Cohen, who prior to founding Brighton in 2020 originated CMBS loans for Wall Street investment banks, Citigroup, UBS and Deutsche Bank, said the lack of flexibility in loan documents can often put borrowers in a challenging position in not being able to communicate directly with the originator.  

“If you’re floating down the Amazon on a peaceful river and then you stick your hand in and get your fingers bitten off by piranhas, you’d understand what you’re seeing on the surface is not what is on the bottom,” Cohen said. “The inherent problem in CMBS is that you don’t necessarily have an aligned interest amongst the borrower and the lender.”

Cohen said one way to minimize CMBS  surprises in troubled times would be if special servicers treated the process more like balance sheet loans, but doing so may drive away investors willing to buy these more risky products. He said borrowers can also help themselves by gaining more understanding about recourse carveouts and triggers. 

CMBS lenders will often return to borrowers who encounter hiccups with past loans because of how lucrative the product is for banks, according to Cohen. Demand has also picked up for CMBS due to rising interest rates, tougher underwriting standards at banks and the lack of balance sheet capacity, according to Cohen. All of this means that borrowers have fewer options when seeking capital. 

“Many of the loans executed via CMBS today would have been handled by super-regional and regional banks in the past when their portfolios were in better shape,” Cohen said. “That’s why there is now a predominance of five-year CMBS loans compared with years past. For many it serves as a haven until the interest rate and devaluation storm clears.”

In general, much has been put in place in recent years to improve the CMBS borrower experience. 

There are also undoubtedly more protections in place today thanks to 2016 CMBS risk-retention rules that require lenders to hold at least 5 percent of issuance. As a result, and in general, there are more players directly involved in the CMBS lending game today.

“The B-piece buyer and ratings agencies serve as gatekeepers,” Putro said. “With risk-retention provisions, the lenders/issuers have skin in the game that wasn’t there before the law went into place in 2016.”

Putro added that cash-out refinancings were an issue in the CMBS market for many years with borrowers re-securitizing loans multiple times while taking equity out each time if values were rising. 

“Eventually it would leave little incentive for the borrower to add equity if a loan went sideways since they had basically made their return already,” Putro said. “What’s happening now is with values having come down a bit, it’s tougher to get those cash-out refis with investors and lenders also more sensitive to it.” 

Andrew Coen can be reached acoen@commercialobserver.com.