A new analysis of commercial real estate (CRE) and commercial mortgage-backed securities (CMBS) performance reveals a mixed picture: ongoing distress in certain sectors, balanced by resilience and improving sentiment across others.
According to the latest data from CRED iQ, CMBS delinquency rates ticked down in September to 8.59%, a modest improvement from 9.44% in August. Loans in special servicing also declined to 10.63%, pushing the combined distress rate to 11.28%, down slightly from 11.78% the prior month.
Although distress levels remain well above the sub-5% range seen in 2022 and early 2023, they’ve generally stabilized between 10% and 12% throughout 2025—showing that while challenges persist, the market has found a degree of footing.
Office and Multifamily Lead Distress; Industrial Remains Strong
The office sector continues to account for much of the ongoing distress, followed by multifamily properties. Retail and hospitality assets, however, posted improvement in September, while industrial properties remain the most stable thanks to steady e-commerce demand.
Market Conditions Offer Cautious Optimism
Stabilizing Treasury yields and the Federal Reserve’s recent rate cut have injected a note of cautious optimism. Lower borrowing costs could provide refinancing opportunities for some of the $957 billion in CRE debt set to mature this year. Banks hold roughly $450 billion of that total, while CMBS and CRE collateralized loan obligations (CRE CLOs) make up about $230 billion.
Nationwide, cap rates inched up to 6.4% from 6.3% a year ago. Retail properties averaged 7.1%, followed closely by office at 7%. The Commercial Property Price Index (CPPI) rose 0.9% year-over-year, signaling modest price gains despite tighter market conditions.
Capital Markets Activity on the Rise
One encouraging sign: capital markets activity is picking up. Private-label CMBS issuance climbed 26% year-over-year to $91.4 billion, fueled by strong single-asset, single-borrower (SASB) transactions. Agency CMBS loans surged 39% to $105.7 billion, driven by Fannie Mae and Freddie Mac, while CRE CLO issuance jumped an impressive 234% to $22.7 billion, reflecting heightened investor appetite for yield.
In the first half of 2025, agencies accounted for 20% of CRE lending—down from 25% a year earlier—while debt funds and REITs increased their share to 14%. Banks remain the dominant force, holding 49% of the $6.2 trillion in total CRE debt outstanding.
Outlook: Opportunities Amid Persistent Headwinds
Macroeconomic indicators such as inflation and employment remain soft but steady. CRED iQ analysts note that investors may find selective opportunities in industrial and multifamily sectors but should remain cautious toward office exposure.
“Stress-testing portfolios against upcoming maturities and tracking special servicing trends will be crucial,” the report advises. “If interest rates continue to ease following the October FOMC meeting, refinancing windows could expand—but resolving existing distress will be key to maintaining market stability heading into 2026.”
Source: GlobeSt.