Morningstar DBRS' Takeaways From CREFC Annual Conference 2025: CMBS Withstanding Tariff Shocks for Now

As part of its takeaways series, Morningstar DBRS is publishing several write-ups about pertinent topics discussed at CREFC Annual Conference 2025, an industry conference in New York City for commercial real estate (CRE) and commercial mortgage-backed securities (CMBS). Following her appearance on the Industry Leaders Roundtable, Erin Stafford, Managing Director, North American Real Estate Ratings at Morningstar DBRS, gave her thoughts on some of the topics discussed.

There has been a lot of uncertainty with the Trump administration's focus on tariffs and the resulting global trade tensions. Given this volatility, one would expect CMBS new issuance to slow down, but that has not been the case. Stafford echoed sentiment that the CRE industry has persisted despite this rocky period. The industry has adapted and become more creative. Stafford noted that some transactions are smaller than others, but there are still regular issuances.

Maturity defaults have risen this year, but Stafford explained that while maturity defaults have always ebbed and flowed, they average about one fourth of all default activity in the long run. This is a natural part of the CMBS market's lifecycle. When analyzing CMBS transactions, Morningstar DBRS uses the loan-to-value ratio (LTV) at maturity as one variable in its model to determine the probability of default. Loans with higher LTVs at maturity have a greater probability of default than those with lower LTVs. The payoff rate for maturing loans is currently 45% to 50%.

On the topic of extensions, Morningstar DBRS analyzes loans as if they are fully extended. For example, if a loan has a term of only one year but four one-year extension options, then Morningstar DBRS would analyze the loan as if its term is five years. However, if a loan does not have any extension options but gets extended as part of the special servicing process, then there usually is some sort of contribution from the sponsor, whether it be more equity from the sponsor, additional loan structures, or reserves set aside. These extensions are never free. On that front, Stafford is "pleased with what servicers are bringing to the table."

Similar to extensions, refinancings are happening even though interest rates are much higher now than they were several years ago. Again, sometimes sponsors need to make adjustments to offset the impact of higher interest rates, such as an equity infusion, in order to refinance the loan. According to Stafford, the most challenging loans to refinance often have a history of poor performance leading up to the maturity date and must navigate higher interest rates and possibly even upcoming tenant rollover that requires capital investment.

Stafford noted that more recent CRE collateralized loan obligations have tended to have what was viewed as more stabilized assets with far less upside than what was seen in the past vintages. It is not uncommon for borrowers to bridge a loan with another once the first one matures, referred to as the bridge-to-bridge approach. The risk with this method, per Stafford, is that bridge-to-bridge financing could be just punting off a problematic property on a highly levered loan.

It's not all riskier bridge-to-bridge loans though. Stafford has seen conduit CMBS deals this year with pools of multifamily loans and loans with investment-grade credit characteristics. These CMBS deals are more conservative in their underwriting. The market is big enough for both, and Stafford notes it can be successful as long as credit rating agencies and investors differentiate the credit.

Written by Caitlin Veno

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