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Commercial real estate distress is accelerating, with the latest data from Trepp showing that the special servicing rate for commercial mortgage-backed securities (CMBS) soared to 10.57% in June 2025—the highest level since May 2013. This marks the third consecutive monthly increase and reflects mounting pressure from declining property performance and the growing number of maturing loans.

Over the past year, the special servicing rate has jumped by nearly 225 basis points, climbing from 8.23% to 10.57%. In just the past month, $750 million in loans were newly transferred to special servicing. Meanwhile, the overall balance of outstanding CMBS loans shrank by $8.2 billion, a signal of both falling loan origination and increasing financial strain.

Office Sector Remains Ground Zero for Distress

Office properties continue to bear the brunt of market instability. Trepp reports the office special servicing rate reached 16.38% in June, up sharply from 10.79% a year ago. Despite only a slight increase over the past month, office loans still accounted for $1.7 billion—57% of all new transfers to special servicing.

Mixed-Use, Retail, and Lodging Also Face Growing Challenges

Mixed-use assets had the second-highest distress rate at 12.05%, a slight improvement from May but still significantly higher than the 9.34% recorded in June 2024. Retail properties followed with an 11.93% special servicing rate, up from 10.82% a year prior. Lodging loan distress climbed to 10.11%, a jump from 7.28% last June.

Multifamily properties fared somewhat better. While their special servicing rate reached 8.18%, the sector was one of the few to show month-over-month improvement, dropping by 24 basis points.

Notable Loans Entering Special Servicing

Two high-profile loans illustrate the growing risks in the sector:

  • Ashford Highland Portfolio: This $590.3 million loan backed by 22 hotels across the U.S. was transferred to special servicing due to an impending monetary default. Despite a 2018 valuation of $1.2 billion, occupancy had dropped to 56% by early 2025, with a debt service coverage ratio of 1.41x.
  • 1440 Broadway, NYC: A $415.3 million mixed-use loan secured by a 740,000+ SF property on 41st Street and Broadway is also in special servicing after a maturity default. Formerly anchored by WeWork, the building had just 59% occupancy and a concerning debt service coverage ratio of 0.15x as of mid-2024.

Outlook: Rising Risk Across the Board

The sustained rise in special servicing rates is a clear indicator of systemic stress across commercial real estate sectors, particularly for office, mixed-use, and lodging. With nearly $3 billion in new loans entering special servicing in June alone and loan maturities looming, the second half of 2025 may bring more volatility unless market fundamentals begin to stabilize.

For lenders, investors, and borrowers alike, these trends underscore the need for proactive asset management and renewed focus on risk mitigation strategies.

 

Source:  GlobeSt.

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Commercial real estate distress is growing as more property owners struggle with their loans, and rising insurance costs are adding another challenge, especially for small landlords.

Insurance brokers and lenders predict that more borrowers will face force-placed insurance, which lenders apply when a borrower’s coverage lapses or is inadequate. This type of insurance is often 10 times more expensive than regular coverage, placing a heavy burden on small property owners.

Lenders impose force-placed insurance to protect their investments when a property is insufficiently covered against risks like natural disasters. This insurance, which typically covers fire and wind damage, is added to the loan, increasing monthly payments. Force-placed insurance becomes especially prevalent during times of financial distress, such as the 2008 Great Recession, and could become a bigger issue if the real estate market worsens.

The average cost of insuring commercial properties and apartments has risen sharply, leading to higher premiums that may force borrowers into bankruptcy or foreclosure. Some borrowers opt to keep force-placed insurance, as it’s cheaper than market-rate coverage. While force-placed insurance doesn’t directly trigger foreclosure, failure to pay these premiums can add to the loan balance, worsening the situation for both borrowers and lenders.

For properties with securitized loans, force-placed insurance can also lead to special servicing, where payments rise drastically. Though lenders are required to give borrowers 45 days’ notice before imposing force-placed insurance, many still struggle to secure appropriate coverage, especially smaller property owners who lack the resources of larger portfolios.

In the end, rising insurance premiums contribute to the growing financial strain on property owners, further complicating the already challenging landscape of commercial real estate.

 

Source:  Bisnow

 

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The CMBS special servicing rate is continuing to creep higher. In July, it was up month-over-month, by seven basis points to reach 8.30%, according to Trepp.

This year, special servicing started at 6.95% and has grown every month, meaning an additional 135 basis points since January 1, 2024, and 168 year-over-year. The rate is at a three-year high and is currently 350 basis points above the July 2022 level. The seven-basis movement is small – but the cumulative shift is significant.

Special servicing rates vary by property type. Currently, office is at the top with the July 2024 special servicing rate of 11.25%, up from 7.33% a year ago. The next highest was retail at 10.89%, only two basis points above the 10.87% rate the prior year. Then mixed-use went from 6.89% in July 2023 to 8.93% in July 2024. Lodging was 7.06% in 2023 and 7.33% in 2024. Multifamily saw a more appreciable absolute gain to 5.11% from 3.26%. The smallest level of special servicing was industrial’s increase from 0.31% to 0.40%. The change between June and July 2024 was industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+46 basis points); mixed-use (-41 basis points); and retail (+7 basis points).

As usual, type 2 CMBS loans were in much better shape than type 1. The distribution of the former, from July 2023 to July 2024, was industrial (0.20% to 0.30%); lodging (6.95% to 7.27%); multifamily (3.26% to 5.11%); office (7.06% to 11.21%); mixed-use (6.99% to 9.12%); and retail (10.26% to 10.35%). For the June to July move, the amounts were industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+47 basis points); mixed-use (-41 basis points); and retail (+12 basis points).

For type 1, the year-over-year changes were industrial (69.35% to 84.11%); lodging (35.13% to 24.94%); multifamily (0.00% to 11.76%); office (41.07% to 17.91%); and retail (66.22% to 93.68%). Month-over-month changes were industrial (+99 basis points); lodging (+16 basis points); multifamily (-7 basis points); office (-25 basis points); and retail (-40 basis points).

The rates could have been worse. According to Trepp, new transfers joining special servicing were on the “lighter side,” just under $1.9 billion. The two largest loans entering special servicing were the $400 million Bank of America Plaza loan because of imminent maturity default and the $233 million Aspiria Office Campus loan because of an imminent balloon payment default before an August maturity date.

 

Source:  GlobeSt.