Trends in Commercial Mortgage Servicing: As Staffing Challenges Appear to Subside, Portfolio Management Remains Intense Amid Market Condition Headwinds

The commercial mortgage servicing industry, like most sectors of the U.S. labor force, experienced employee retention and hiring difficulties in varying degrees of severity over the course of the Coronavirus Disease (COVID-19) pandemic. While servicers’ staff turnover and hiring challenges were especially acute over 2020–21, and generally remained at elevated levels for 2022, the situation may be easing according to second-half 2022 data from master servicers of commercial mortgage-backed securities (CMBS) transactions. As servicers contended with higher turnover, they aggressively accelerated their hiring efforts. Accordingly, many employee departures involved people who were ultimately hired by other servicers or special servicers. Additionally, some departures were people transferring internally to other business lines within the company or to an affiliate, which may be viewed as a softer form of turnover.

Over 2021, servicers benefited from a strong loan production environment feeding CMBS and government-sponsored enterprise (GSE) securitization activity. As a result, servicers by and large focused on filling vacated positions, and some also expanded their workforces. While servicers gained business generally from newly originated loans and fresh capital markets transactions, some added servicing volume from portfolio acquisitions and transfers as well. Aside from addressing new business, and responding to the surge of borrowers’ relief requests in the early months of the pandemic, most servicers also sought to fortify their ranks to address heightened work demands within their existing portfolios. Although loan production and CMBS issuance activity were down sharply in 2022, master servicers’ combined portfolio volume by unpaid principal balances (UPB) still grew, but at a lower rate than in 2021. Perhaps in part related to the dominance of single asset single borrower (SASB) transactions, master servicers’ loan boarding volume by count has declined in each consecutive year since 2019. Additionally, some servicers noted that their small-balance loan portfolios shrank. The net result is that master servicers now service fewer loans compared with the years leading up to the pandemic and that average loan size has increased year over year.

While securitization activity continues to be sluggish and pacing far behind 2022 issuance levels, investors’ service-level expectations from servicers have not diminished. Technology enhancements have certainly bolstered servicers’ abilities to manage their workflows and process data with greater efficiency and accuracy. However, servicers continue to contend with deal structure complexities, steady volumes of consent requests, the need for heightened asset surveillance, especially in the current rising interest rate environment, and the extensive, and seemingly always increasing, loan-level compliance tracking and investor reporting requirements.

DBRS Morningstar assessed the composite portfolio profile and activity of commercial mortgage servicers, especially in the CMBS sector, by analyzing the semiannual data it received from the four largest servicers, according to the Mortgage Bankers Association’s 2021 Year-End Survey of Commercial/Multifamily Mortgage Servicing Volumes: Wells Fargo Bank N.A., PNC Real Estate/Midland Loan Services, KeyBank N.A., and Berkadia Commercial Mortgage LLC. As the master servicers for most CMBS and GSE-sponsored transactions, and overseeing diverse portfolios covering a wide range of other investor types, these companies collectively serviced nearly 100,000 loans having an aggregate unpaid principal balance of more than $2 trillion as of YE2022. Accordingly, they serve as an excellent representation of not only the CMBS and GSE servicing sectors but also the entire commercial mortgage servicing industry. To examine selected areas of special servicing, DBRS Morningstar aggregated semiannual data received from its ranked special servicers.