CMBS: Who’s Winning, Who’s Losing?

The commercial real estate market continues to rally, with activity levels not since before the Global Financial Crisis. At the same time, distress among legacy loans continues to rise, highlighting a widening gap between the good and the bad. In 2025, issuance of commercial mortgage-backed securities reached $125 billion, up 19 percent year over year and more than triple 2023 levels. Yet Morningstar Credit’s reported special servicing rate climbed to 10.7 percent in December 2025, up from 9.7 percent in 2024 and 7.2 percent in 2023.

At a high level, this divergence reflects a fundamental shift in what is getting financed now compared to a decade ago. Property types such as data centers have surged in prominence, accounting for a growing share of new issuance. Office transactions are still occurring, but asset quality has become a major differentiator, with capital flowing to newer buildings with strong credit tenants, while older, functionally obsolete assets languish for years in special servicing.

Property type matters

Even though office assets represent the largest share of loans in special servicing, they continue to be the most common property type in new deals—accounting for more than a quarter of all loans originated in 2025. However, the office properties appearing in recent transactions look different from those sitting in special servicing. Specially serviced offices tend to be older, Class B/C assets, often in buildings that cannot easily be modernized. New deals are dominated by modern, Class A, LEED‑certified buildings with long leases to high-quality tenants.

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A similar shift is occurring in retail. While Class B regional malls make up the majority of specially serviced retail loans, they have virtually disappeared from new lending pipelines. In place of the regional mall, the large retail properties securing new CMBS loans tend to be high‑performing, superregional malls and lifestyle centers that function as regional destinations. Examples include Ala Moana Center in Honolulu—the world’s largest open‑air shopping center—and Ridgedale Center in Minnetonka, Minnesota, an upscale retail hub serving a large regional customer base. At the same time, necessity-based retail, particularly grocery‑anchored shopping centers, continues to gain favor among lenders for its stable, demand-driven performance.

Street by street: Location matters

Although office lending made a comeback in 2025, the location of properties being securitized was vastly different from the distressed legacy loans. After New York—which represents the lion’s share of securitized office exposure—Atlanta and Boston ranked among the top five markets for securitized office loans in 2025, together accounting for a larger presence in CMBS than San Francisco, Philadelphia and Washington, D.C. combined. These latter metros historically had a large footprint in CMBS but have experienced elevated levels of office distress in recent years.

Location can be as granular as the street. In San Francisco, the bulk of distressed office properties sit along Market Street, the city’s aging commercial hub. Meanwhile, Uber Headquarters and VISA Global HQ, two notable office loans securitized in 2025, are Class A properties in the new master-planned Mission Bay neighborhood. Similarly, the only two large Chicago office properties securitized in the past year were located outside the southern portion of the Loop, where aging inventory and concentrated distress have weighed heavily on asset performance. Many of the properties in this area have continued to lose tenants, leading to long tenures in special servicing, with large losses likely upon disposition.

Slow resolutions for distressed assets

Even with a strong lending market and slightly lower interest rates, many of the distressed loans are not financeable because the underlying property values and cash flows have deteriorated sharply in recent years. Many older Class B office buildings have become functionally obsolete, struggling to attract tenants in a market that increasingly favors modern, amenitized space.

With more older loans moving to special servicing and distressed loans spending more time in special servicing than before, the rate continues to trend upwards. In the past, loans would regularly get worked out in under two years. However, it is now common to see a loan that has been specially serviced since 2020, with no clear path forward. 

All signs point to a strong year of CMBS issuance in 2026, highlighting renewed confidence in the commercial real estate market. There is also some indication that the pace of workouts may finally be picking up. Crain’s Chicago Business recently reported that 175 West Jackson in the Chicago Loop has been sold, after over four years in special servicing. Despite selling for pennies on the dollar, it could be a positive sign for a market that has seen limited price discovery on distressed office properties. However, the sheer volume of long-distressed assets without defined resolution strategies and a steady flow of maturing loans that have seen cash flow erosion leads us to expect the distressed rate to remain elevated through 2026.

Sarah Helwig is vice president of Morningstar Credit.