The government is the most aggressive CRE lender. But even CMBS balances are surging again, water under bridge?
By Wolf Richter for WOLF STREET.
Commercial real estate has gotten double-broadsided, first by the effects of the pandemic, including working-from-home; then by the higher interest rates. It was a sudden turn of events for most property types – except for indoor-mall and big-box real estate which had been getting crushed for years by the Brick-and-Mortar Meltdown.
It came after years of super-low interest rates that caused valuations to balloon and that allowed landlords to cashout-refinance their properties with massive new loans at low rates and supported by Loan-to-Value ratios based on these ballooned fantasy valuations in appraisals commissioned to back those loans.
A big portion of those pre-pandemic or pandemic-era loans were floating-rate loans that quickly became economically impossible when short-term rates began to soar in mid-2022, and so landlords struggled with their interest payments.
And fixed-rate loans could no longer be refinanced when they matured because a property that made economic sense with a 3% loan didn’t make economic sense with a 7% loan.
So these troubled loans have been ricocheting through the financial system and investor portfolios since the pandemic, with lots of defaults, foreclosures, deeds-in-lieu of foreclosure, loan modifications such as extend and pretend, write-downs, write-offs, loan-loss reserves, and ultimately sales of loans or properties at massive haircuts to new investors that then could do something with those properties because their cost basis was a lot lower and realistic.
All combined, there were $6.3 trillion in commercial real estate loans outstanding in Q2 2026, spread across two types of CRE loans:
1. CRE loans on properties with rental income, total balance outstanding: $5.1 trillion (properties that are completed and have tenants).
2. CRE debt on properties that did not produce rental income, total balance outstanding: $1.41 trillion, of which $696 billion in construction loans (paid off when the completed income-producing property is refinanced); and $712 billion in loans on owner-occupied commercial properties (a business owns and occupies the property and services the debt). Data from the Mortgage Bankers Association.
Largest Holders of the CRE debt:
- Banks: $1.92 trillion, or 37.5%, of income-producing CRE loans (plus $1.17 trillion in loans that are not income producing).
- US government via Fannie Mae and Freddie Mac: $1.17 trillion, or 22.8% of income-producing debt.
- Insurance companies: $815 billion, or 15.9% of income-producing debt.
- CMBS, CLOs, and other securitized: $771 billion, or 15.1% of income-producing debt.
- Other government: $220 billion or 4.4%.
Banks and thrifts held $1.92 trillion of income-producing CRE loans (37.5% of the $5.1 trillion) plus $1.17 trillion in loans that are not income producing: $454 billion of construction loans and $712 billion owner-occupied loans.
In total, banks held a record $3.1 trillion, or 47% of that $6.3 trillion total CRE debt.
Foreign banks’ US-chartered branches are included, such as famously Aozora North America, a subsidiary of the Japanese bank Aozora that in February 2024 disclosed big losses on its $1.9 billion US office-loan portfolio; or also famously Deutsche Bank, which serially reported big increases in loan loss provisions on its US CRE loans and has been offloading loans to clean up its balance sheet.
In 2024 and the first half of 2025, banks’ CRE portfolios remained flat as they offloaded troubled loans and issued new loans at about the same pace.
But banks, which are in the business of making loans, once again increased their CRE loan book toward the end of 2025 and in 2026. By Q2, their CRE loan balances were up by $88 billion year-over-year, or by 2.9%, according to data from the Federal Reserve’s Z1 accounts.
The federal government held $1.17 trillion of the $5.1 trillion in income-producing CRE debt, via Fannie Mae and Freddie Mac (the GSEs). The GSEs are aggressive multifamily lenders, and their loan book keeps increasing.
In Q2, the GSE’s multifamily CRE loans grew by 8.2% year-over-year, according to an analysis by Trepp.
Multifamily loans account for $2.34 trillion, or 46% of the income-producing CRE debt, and the government, via the GSEs, holds half of it ($1.17 trillion).
Insurance companies need predictable cash flows and have long-term investment horizons, and they have been and continue to be substantial investors in CRE.
Their income-producing CRE debt outstanding increased by 3.3% year-over-year to $815 billion in Q2, according to Trepp.
CMBS, CLOs, and other ABS… so here we’re talking about securitized CRE debt: Commercial Mortgage-Backed Securities, Collateralized Loan Obligations, and other Asset-Backed Securities.
Most of this category is CMBS. They have for years featured in the meltdown of the office sector of CRE, where bloodletting has been enormous. WOLF STREET has documented this with countless articles starting in 2020, when vacancy rates exploded, and then when office debt keeled over.
The delinquency rate of office CMBS has been gigantic, and worse than at the peak of the Financial Crisis. When the market thawed in 2022, office towers, foreclosed or not, began selling with haircuts of 50% to 80% compared to pre-pandemic prices. It has been a royal mess (our October 5 report on office CMBS is here).
We have long suspected that banks sloughed off their riskiest office loans in the years before the pandemic by securitizing them and selling the CMBS to investors and letting investors take the brunt of the losses over the past few years.
But the Wall Street show must go on, and investors are chasing yield – a match made in heaven. Those were old loans, and old investors, let bygones be bygones, water under the bridge, etc., and now there are new loans and new investors, and so new CMBS are being sold to these new investors at a breakneck pace, and year-over-year, the CMBS balances have surged by 7.4%, to $771 billion, according to Trepp.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:
I wonder what the yields are on various tranches of CMBS. What kind of rate does it take to tempt professional money managers to hold the note on a half-empty skyscraper, or an apartment complex filled with people who will lose their jobs soon, either to AI or recession?
We obviously can’t use rates at the time of issue as a guide, because these CMBS will have been discounted by a lot since then.
They’re usually 10 year instruments. The ones issued in 2017-2021 are awful.
For example, Google “GS Mortgage Securities Trust 2021-GSA3 prospectus.”
You can see that outside of the interest variable tranches, the rates go from 1.366% for Class A-1 to 3.2743% for Class C. Most of these will be outstanding until 2031 unless redeemed early, so even if the underlying commercial mortgage loans perform, the value is impaired by interest rates having gone up.
Recent issuings are much better of course.
If most are a 10 year cycle and interest rates went up starting in 2022. That means we’re about halfway through the loans that need to refi and it will be into significant higher rates?
Correct. Given that most of these loans are either interest/only or only very partially amortizing, meaning that a balloon payment of 70-100% could be due at maturity, there’s a very good chance that these loans will enter maturity default as the sponsors are unable to refinance at the higher rates.
So we are basically socializing the hell out of these losses. That’s why contagion is a non-issue.
That’s multifamily only.
and yet I’m seeing big money is sniffing around these deals
but only at SIGNIFICANT haircuts – 50%+
I remember few years back when General Growth REIT defaulted on 3 malls in Tucson(many elsewhere) and investors who sold them at big $$ prices 10 years earlier were ready to snap up at 20 cents on fiat $dollar
After the impending crash, they will have socialized losses all the way through Gen Z’s grandchildren’s generation.
all part of great reset coming
but 1st govt grifters need to keep spending like drunken sailors
and keep DEVALUING fiat $dollar so much(like all defaulting govts have done in past)
bankrupting 99% so 1% can Hoover them up
and then do GREAT RESET
IMHO all govt debt(fed, state, county,city) are all NULL AND VOID
since they have been issued with no intent on paying back
Are CMBS balances growing because of Datacenters?
The buildings/ real estate is probably offloaded to third parties.
Well the servers are too, increasingly, but those deals are probably not under CMBS.
I don’t know specifically, but what I do know is that limited use commercial properties are much harder to finance than more normal ones.
As an example, if you own an office building, if an accounting firm moves out, another accounting firm, a law firm, a marketing firm or numerous others can move in with minimal changes needed to the space.
If you rent to a bowling alley, if the bowling company leaves, there’s not much you can do with that space other than rent to another bowling company. If there is none, you have to spend millions redoing the interior.
I suspect data centers are closer to bowling alleys than prime office space in NYC or San Francisco.
I love them financing a DEPRECIATING ASSET
this year cutting edge, next year 2nd best, after forget about it
hope those bonds are 3-5 years at 10% or better
this year A rated, next B after C-
Let the auctions begin!
How much of the CMBS is multifamily?
There are about $70 billion “private label” multifamily CMBS, meaning the mortgages in their mortgage pools are not backed by the government.
In terms of the multifamily mortgages held by Fannie and Freddie… they’re getting securitized into “agency CMBS” similar to single-family agency MBS, and they have a similar credit profile as Treasury securities since they’re government backed.
and so many are now reaching their initial rate reset after 5 years
let the extend and pretend continue
Wall St Sees Ominous Sign in Bond Market’s Latest Selloff…
Wolf,
Very interesting stuff – even with the march of the internet, RE stats (and RE loan stats) are still fairly opaque to the general public (relative to say, publicly traded corporate financials).
(Perhaps “obscure” is a better word – the FDIC puts out a ton on bank loans secured by real estate – like many hundreds of data fields for every bank – but I don’t think that I’ve ever seen that aggregated breakout of bank interest bearing/non interest bearing CRE loans before. And it is eye opening. And that owner-occupied loan number held by banks…whoa, Nelly.)
(Broadly speaking, you would think that banks – very commonly loan originators/underwriters – ruthlessly self-select on what loans they keep in-house versus the cr*pola they palm off to insurers/CMBS (2008 massive disaster notwithstanding). But that owner-occupied number – which smells of cash-out refis rooted in ZIRP-addled overvaluations…well, that is worth looking into more closely).
Even more useful will be the second order metrics that can be derived from the data in the post, when combined with external data/trends. But that will take some time to process.
You don’t understand the meaning of “owner occupied” and then spin a conspiracy theory out of your non-understanding. A car dealership for example has a mortgage on the 10-acre property and buildings… that’s a loan on an “owner-occupied” property. Intel gets a loan for the land and building of one of its data centers. That’s an owner-occupied property. What it means is that there is no “rent” that pays for the loan, but that the business itself pays for the loan. I explained it in the article. Owner-occupied are lower risk than tenant-occupied.
Seems like insurance companies sometimes invest in risky areas too. Not sure if enough to cause any issues and not sure how much is actually private equity or other things which might have knock on effects. It is the stuff that is more difficult to see that worries me more.
Netflix planning to fire 5% of its 17,000 staff as it struggles in wake of failed Warner Bros. takeover, says Hollywood’s top insider
The company’s share price has fallen more than 40 percent since December, when co-CEOs Ted Sarandos and Greg Peters were touring the iconic Warner Bros Studio lot.
You should have posted that comment on my Office CMBS article which discussed the office towers that are now delinquent on their loan, where Netflix has its production headquarters, whose lease is coming up for renewal, with renewal still being up in the air:
https://wolfstreet.com/2026/10/05/office-cmbs-delinquency-rate-re-spikes-to-12-2-far-worse-than-financial-crisis-peak-as-end-of-extend-and-pretend-looms/
Add more debt and grow your way out of the debt crisis. Ha, that’s the lie over and over again. Be careful with Bank CDs from non venture capital towns, when mortgage rates get to 9% and 10%, when the Great Depression effecting ordinary people takes hold pushing multiple generation of family’s into living in one home, banks will fail, it’s just a matter of time. Someone asked whats so important about 3 consecutive closes above 5.32% on the 10 year, because when that happens 6.66% 10 year yield is the next battle line or target, if that fails on the monthly close than 8.16% is upon us. We could go from 5% to 8% in a calendar year. All the earnings as a result of free money disappears and business default on their debt. I think Oracle goes the way of Lehman brothers and bear sterns. Larry Ellison wont make payments on his personal guarantee, and “we the people” won’t be happy with a bailing out billionaire who made bad bets that the mania will last forever. During the Dutch tulips mania, one bulb cost more than a skilled carpenter made in a year! These semiconductor collateral loans will collapse in real value like 10 times faster than commercial real estate. The velocity of change in value of the CDS credit defaults swaps in AI or call it SI now if that’s your preference will create counterparty risk that makes the 2008 and early 2009 look like a walk in the park. Perfect storm is here, the memo went out. You can’t put the toothpaste back into the tube! Thanks for the article and the format for discussion. It’s not going to be a credit crisis it’s going to be a fiscal crisis in Sovereign debt. AI is powering the math to let smart money know, it’s inevitable!
It won’t happen. I kind of wish it would so that the greedy and the gamblers get to taste actual consequences but the US government has clearly and consistently demonstrated that the frugal and prudent are to be punished while the foolish and selfish are rewarded. With all that is going on in the world, much of it initiated by the US government or at least directly involving the US government, this is no time for the US empire to be allowed to be threatened by it’s own money system. The monetary policy makers have ways out of allowing the empire to be swiftly damaged by a crash in asset prices, stocks, investments and the AI build. Those options include more quantitative easing, provoking more inflation, manipulation of many types of markets by many means, picking and choosing winners and losers directly through various schemes and bailouts, socializing losses such similar to how they took on great quantities of mortgage backed securities, changing banking rules on the fly, changing the reserve ratio, manipulating the treasury market directly and indirectly…….and many more possible options.
Give in, give it a try. Just throw some money around. If you are a big time player, you can throw a lot of other people’s money around. If you don’t have money, throw taxpayer money around through massive leveraging and taking on loans that don’t make financial sense in a logical world or be a politician and throw taxpayer money around that way.
It pays to be greedy, selfish, and short sighted these days and one effective way to go broke is to let morals get in the way of financial decisions. Encourage immoral behavior and the personal and macro level through personal financial decisions and monetary policy. Cause massive damage to the environment, society, family as a base unit, and spiritual well being and you may get to be part of the well-to-do.
That’s the issue with more inflation and stable employment it’s going to be hard for Warsh to start QE. On the fiscal side we will issue more debt. It’s not like we can send a naval embargo to the Cayman Islands and tell the bankers who keep their capital there to buy more debt or else. Probably not :)
It’s perfect storm because employment is strong and will remain strong for the next year but inflation will be stronger! The policy of arresting 2k to 3k people and deporting workers a day keeps unemployment low and manual labor wages high creating more fuel for inflation. This is the crisis that isn’t easily fixed, unless we cut real spending and raise revenue and get the budget deficit down to 3% than that creates real problems too. Perfect storm all around
It’s bad but don’t let your own sense of financial injustice convince you that the end is nigh. It may well be, but there are plenty more tricks to play yet. Don’t fall for the Ed Zitron rhetoric, financial engineering pays the big bucks because it works.
Since banks also hold a ton of US Treasury and Agency debt, I wonder what percentage of all bank assets, all CRE amounts to. It might not be as much as people tend to think.
On the other hand, it doesn’t take much foolishness for banks to blow themselves up, since many/most banks don’t really like to hold equity cushions all that far in excess of required statutory minimums (since that would cut into return on equity and dividend payouts).
In the last day or so, just *one* souring CA-based CRE loan sent Bank OZK’s market cap down 5%.
“Status of the Commercial Real Estate Debt and Who Owns it in 2026“
Fools, fools and greater fools. That’s who.
The small small regionals and credit unions that we work with have increased their minimum qualifications and toughened underwriting guidelines for small balance and middle market CRE. Loan to value has gone down while DSCR has gone up, and appraised values are often viewed with greater skepticism. Long story short, it’s getting harder and more expensive to fund b, b- and c credits.
All I know for certain is that the list of owners of strip malls across the country is massive. 3 to up to 20 different LLCs or companies or trusts and their SAOA on each one. The family offices diversified and spread the risk as far as they could sell it down the river! I briefly thought about investing in REITS but glad I didn’t hop in that sinking boat. Even our local county is deciding to be choosy when it begins to offer tax delinquent properties for sale this time around.