CMBS Loan Defaults Expected to Increase in 2023 Following Two Years of Declines

Article originally posted on HERE on June 6, 2023

U.S. CMBS loan defaults edged lower in 2022 as post-pandemic stabilization of asset performance and property cash flows continued, according to Fitch Ratings. However, the rating agency also reported that the pace of defaults accelerated in 2022’s second half and that the current year will bring more of them.

The total annual and cumulative default rates for 2022 were 0.3% and 17.9%, respectively, down from 0.4% and 18.0% in 2021, the second consecutive year of declines after peaking at 3.3% and 18.2% in 2020 following pandemic-related disruptions. The second half of 2022 saw a “significant increase” in maturity defaults as interest rates rose, Fitch said.

“Higher interest rates, weaker commercial real estate fundamentals and tightening credit will spur greater refinance challenges, leading to more defaults in 2023,” according to Fitch’s report. “Fitch anticipates the overall declining default trend to reverse in 2023, with the annual and cumulative default rates expected to increase amid higher volumes of loan transfers to special servicing during their term as well as an increase in maturity defaults. CMBS issuance volume is expected to be lower with continued banking sector volatility and elevated interest rates.”

Among Fitch-rated CMBS, office loans had the greatest increase in defaults in 2022 and also accounted for the largest share of total defaults at 49.4%, or $1.58 billion.