The Evolution of Defaults and Losses in CMBS

Research evidence excerpt

The Evolution of Defaults and Losses in CMBS

FoundationM

Executive Summary

While conduit 2.0 losses have remained relatively modest compared with those

experienced in the legacy conduit universe, the current environment has heightened

investor attention on future CMBS loss expectations as refinancing pressure and

sector-specific stress continue to build. The current CRE cycle differs from the GFC in

that distress has been more concentrated rather than driven by a broad collapse in

liquidity and property values. While the GFC was characterized by more aggressive pre-

crisis underwriting, widespread valuation declines across property types, and a systemic

contraction in credit availability, the current cycle has been shaped by higher financing

costs, maturity-related challenges, localized supply imbalances, and structural

obsolescence risk, most notably within the office sector. Despite the normalization in

interest rates from the exceptionally low levels that prevailed following COVID, property

performance has remained relatively resilient in sectors such as industrial, multifamily, and

necessity-based retail. As a result, today's loss environment reflects a combination of

cyclical pressures and long term changes in space utilization rather than the broad-ranging

deterioration that defined the post-GFC period.

Exhibit 3: Cumulative conduit bond losses by vintage

Cumulative Conduit Bond Losses by Vintage

200 18%

Billions 180 16%

14%

12%

10%

8%

80 Cumulative Conduit

Bond Loss:5.1% 6%

4%

20 2%

- 0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Securitized Balance Cumulative Bond Loss % (RHS) Cum. Bond Loss %- All 1.0/2.0 (RHS)

Source: Trepp, Morgan Stanley Research