CMBS Delinquencies Climb as Defeasance Challenges Persist

By Majid Radaei, RadCRE · · Industry Insights

CMBS delinquencies are rising, particularly for office and retail, with Trepp reporting the overall delinquency rate nearing 5% and defeasance becoming a less viable exit strategy.

CMBS Market Navigates Rising Delinquencies and Deeper Distress

The Commercial Mortgage-Backed Securities (CMBS) market is currently grappling with elevated delinquency rates, a trend largely fueled by underperforming office and certain retail assets. Public reports from Trepp and the Mortgage Bankers Association (MBA) indicate a sustained upward trajectory in loan defaults, particularly for properties facing significant operational headwinds and maturity wall challenges.

According to Trepp's latest CMBS delinquency report for April 2026, the overall delinquency rate across all property types climbed to 4.95%, up from 4.79% the previous month. This increase was primarily driven by the office sector, which saw its delinquency rate surge to a troubling 10.75%. Retail followed at 7.20%, while multifamily, industrial, and hotel sectors maintained relatively lower delinquency rates due to healthier fundamentals in most markets. This highlights a divergence in performance across property types that is becoming increasingly pronounced within CMBS portfolios.

Defeasance Becomes a Less Accessible Exit Strategy

Historically, defeasance has served as a critical mechanism for borrowers to exit CMBS loans prior to maturity, particularly during periods of declining interest rates. However, in the current high-interest rate environment, compounded by persistent inflation and economic uncertainty, defeasance has become significantly more expensive and less feasible. The cost of purchasing substitute collateral (typically U.S. Treasury securities) to match the remaining debt service payments has soared, making it prohibitive for many borrowers, even those with performing assets.

Data from rating agencies like Fitch Ratings and S&P Global Ratings indicate a sharp decline in defeasance activity since 2022. For instance, in 2021, when interest rates were near historic lows, CMBS defeasance volumes approached $50 billion. By contrast, 2025 saw defeasance volumes plummet to less than $10 billion, reflecting the stark shift in financing costs. This reduction in defeasance options leaves fewer avenues for borrowers to refinance or sell properties without triggering costly prepayment penalties or navigating potentially challenging loan modifications.

Impact on Hospitality and Multifamily Assets

While the office and retail sectors bear the brunt of CMBS distress, the hospitality sector, which experienced significant recovery post-pandemic, is now encountering new obstacles. Rising operating costs, persistent labor shortages, and softening RevPAR growth in some submarkets are putting pressure on cash flows. However, select-service and extended-stay properties continue to show resilience, attracting new investors and refinancing opportunities outside of traditional CMBS, often through agency debt or bridge loans from debt funds.

Multifamily, initially seen as a safe haven, is also facing increased scrutiny. While delinquencies remain low, the rapid rise in interest rates has squeezed debt service coverage ratios (DSCRs) for floating-rate loans, especially for properties underwritten at peak valuations. Lenders are more conservative, with bridge loans for multifamily generally priced at SOFR + 300-450 bps, while agency debt (Fannie Mae, Freddie Mac) remains a competitive option for stabilized assets, typically offering tighter spreads and more favorable terms.

RadCRE Perspective

"The current CMBS landscape demands a highly nuanced approach," notes Majid Radaei, Founder of RAD Commercial Realty. "We're seeing a significant bifurcation in the market. While office delinquencies are indeed a major concern, it's critical for investors and developers not to paint all property types with the same brush. For example, well-located, select-service hotels continue to attract capital, but the financing for these deals has notably shifted. Where CMBS might have been a go-to for stabilized hotels a few years back, today we're structuring more deals with agency debt for strong sponsors, or utilizing bridge-to-permanent solutions from debt funds charging SOFR + 350-500 bps. The key is understanding that lenders are highly selective. They're scrutinizing DSCRs, sponsor strength, and market fundamentals more than ever, especially with SOFR hovering around 4.31% and Prime at 8.50%. Defeasance is virtually dead for most pre-2022 CMBS loans, meaning borrowers facing maturities have to come to the table with fresh equity, explore complex loan extensions, or face potential workout scenarios. For our clients, we're keenly focused on crafting bespoke capital stacks that capitalize on the pockets of liquidity that still exist, whether it's through opportunistic debt funds, preferred equity, or strategically leveraging SBA 7(a) for owner-user hospitality acquisitions where the fixed rate and longer amortization can offer crucial stability in these volatile times."

The challenges in the CMBS market are expected to persist as a significant volume of loans mature in 2026 and 2027. This will likely necessitate more loan modifications, discounted payoffs, and potentially an increase in distressed asset sales, creating both risks and opportunistic buying windows for well-capitalized investors.

Tags: commercial real estate financing, CMBS market, loan delinquencies, defeasance, hotel investment sales, CRE capital markets

Sources: Trepp, Mortgage Bankers Association (MBA), Fitch Ratings, S&P Global Ratings, CoStar