CMBS Market Navigates Volatility & Defeasance Shifts in 2026

By Majid Radaei, RadCRE · 2026-05-06 · Industry Insights

The CMBS market faces ongoing challenges from higher interest rates, impacting loan maturities and defeasance activity. Delinquencies for office assets reached 7.4% in Q1 2026.

CMBS Market Conditions: Navigating Higher-for-Longer

The Commercial Mortgage-Backed Securities (CMBS) market continues to face a complex environment in mid-2026, characterized by high interest rates, persistent inflation, and evolving property fundamentals. While lending activity has seen a slight uptick from early 2025 lows, particularly for performing assets, the landscape remains challenging for struggling sectors, notably office. According to Trepp data, CMBS office loan delinquencies climbed to 7.4% in Q1 2026, a stark contrast to other property types like multifamily (1.5%) and retail (4.2%). This divergence highlights the ongoing stress within certain segments of the market.

CMBS issuance, while showing signs of potential recovery, remains significantly below pre-pandemic levels. The Mortgage Bankers Association (MBA) reported a modest increase in commercial and multifamily mortgage originations in Q4 2025, but the overall volume for the year was down approximately 40% compared to 2021. Lenders remain highly selective, prioritizing borrowers with strong sponsorship, robust business plans, and properties in resilient asset classes such as hospitality, select multifamily, and well-located retail. CMBS spreads for investment-grade bonds (e.g., AAA-rated) are currently hovering in the T+150-200 basis point range, reflecting market liquidity and risk perception, while B-piece buyers continue to demand higher yields to compensate for increased default risk, especially in secondary and tertiary markets.

Defeasance Trends Amidst Rate Hikes

The higher interest rate environment has fundamentally altered defeasance trends across the CMBS landscape. Defeasance, traditionally an option for borrowers to release collateral from a CMBS trust before maturity, has become significantly more expensive. With the Secured Overnight Financing Rate (SOFR) currently around 4.31% and the broader yield curve experiencing an upward shift, the cost of purchasing U.S. Treasury securities to replace the cash flow of a mortgage has skyrocketed. This makes it a less attractive option for borrowers seeking to refinance, sell, or restructure their loans.

Prior to the rate hikes of 2022-2024, defeasance was a common strategy for borrowers with low-coupon CMBS debt to capitalize on rising property valuations or favorable sale opportunities. Now, many borrowers are finding that the cost of defeasance outweighs the benefits, pushing them towards alternative strategies like loan assumption or working with special servicers on modifications if they cannot meet balloon payments. For example, a $100 million CMBS loan originated in 2018 at a 4.0% interest rate would face exorbitant defeasance costs today, making a direct sale or refinance extremely challenging without substantial equity injection.

RadCRE Perspective: Navigating the Maturity Wall

"The real challenge in the CMBS market right now isn't just rising rates, it's the sheer volume of loans maturing into a 'higher-for-longer' environment. We're advising clients that the maturity wall, particularly for 2018-2020 vintage loans, is far more precarious than many headlines suggest. These borrowers locked in ultra-low rates and now face refinancing at SOFR + 300-600 bps for bridge solutions, or significantly higher for more structured debt, effectively doubling their debt service. For assets like suburban office, this is a crisis of liquidity and value perception.

At RAD Commercial Realty, we're seeing an increase in distressed asset opportunities that require highly creative capital stack solutions. For hospitality, where operating fundamentals in select markets remain strong, we're actively helping owners source debt that aligns with their business plans. This often involves navigating term sheets for SBA 7(a) (Prime + 2.25-2.75%) or 504 programs for owner-operators, or structuring bridge loans at SOFR + 400-500 bps with strong sponsors for value-add plays. We're also seeing a clear uptick in requests for preferred equity and mezzanine capital (12-18% IRR expectations) to fill the gap where traditional lenders are pulling back from over-leveraged assets. The key isn't just finding a lender; it's crafting a capital solution that truly fits the asset's current cash flow and future potential, especially for those CMBS loans facing imminent maturity with less-than-stellar property performance."

Majid Radaei, Founder of RAD Commercial Realty

Future Outlook and Opportunities

The outlook for the CMBS market remains cautious but presents selective opportunities. The expected influx of maturities, particularly in 2026-2028, will test the market's resilience and lender appetite. While distress opportunities are emerging, particularly for undervalued assets in the office sector, robust underwriting and experienced advisory are paramount. RadCRE continues to monitor these dynamics closely, emphasizing that disciplined investment strategies and proactive capital structuring are essential for navigating the current CRE financing landscape. For property owners and investors, evaluating all financing options – from traditional bank debt and agency financing to more complex mezz and preferred equity structures – will be crucial for success.

Tags: commercial real estate financing, CMBS spreads, bridge lending, hotel investment sales, CRE capital markets

Sources: Trepp, Mortgage Bankers Association (MBA), CoStar, Commercial Observer