In this episode of the REconomy Podcast™, Deputy Chief Economist Odeta Kushi and Senior Commercial Economist Xander Snyder break down whether the commercial real estate market has reached peak distress, explaining why shifts in debt maturities, delinquency rates and sales activity across asset classes may offer a glimmer of optimism.

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Listen to the REconomy Podcast™ Episode 127:

“I would say we are near or very close to the top, depending on the asset class. New distress will still appear as a wave of commercial real estate debt matures through 2026, but as sales pick up and that drain opens, the market’s ability to absorb it will improve.”
— Xander Snyder, Senior Commercial Economist at First American

Transcript: 

Odeta Kushi - Hello and welcome to episode 127 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I’m Odeta Kushi, deputy chief economist at First American, and here with me today is Xander Snyder, senior commercial economist at First American. Hey Xander.

Xander Snyder - Hey Odeta, how’s it going?

Odeta Kushi - Great to have you here today because we’re diving into a topic that’s been front of mind for commercial real estate since interest rates started rising in 2022 — and that topic is distress. Dun, dun, dun! As rates increased, all commercial real estate debt became more expensive to refinance, and floating-rate debt immediately became pricier to service. Property prices dropped too as buyers could no longer afford what they once could when rates were low.

Xander Snyder - Right — and maybe the best place to start today is the asset class most people associate with distress right now: office. In August 2025, delinquency rates on commercial mortgage-backed securities for office properties hit an all-time high of 11.6%, surpassing even post-Global Financial Crisis levels.

Odeta Kushi - For listeners who aren’t familiar with CMBS — those are commercial mortgages bundled into securities, sort of like real estate bonds. They account for roughly 15 percent of all outstanding commercial real estate debt and are often tied to large properties or portfolios. At first glance, an all-time high in office delinquencies doesn’t sound encouraging. I thought we were going to be discussing peak distress — doesn’t that suggest things are getting worse?

Xander Snyder - Fair point — but distress does have to rise a bit before it peaks. The good news is that the September release of delinquency rates showed office delinquencies declined by 50 basis points from August, down to about 11 percent. Still elevated, but after hovering around 10–11 percent for a year, that stability suggests the worst may be behind us.

Odeta Kushi - So some stabilization. That is encouraging. But since CMBS make up a smaller slice of total commercial real estate loans, do they really reflect what is happening across the broader market?

Xander Snyder - Generally, yes, with a few exceptions. Trends in CMBS often show up first because they are traded securities with more frequent reporting. While they do not capture every detail of the broader market, they serve as an early indicator of where wider distress could go.

Odeta Kushi - Good point. So delinquency rates for office CMBS are near a record high, but recent data show a decline. What else suggests we are at or near peak distress?

Xander Snyder - Flat delinquency rates are one sign, but prices have also fallen far enough to attract buyers back into the market. Imagine a bathtub.

Odeta Kushi - Ah yes, the famous economist bathtub analogy. What does the flowing water represent this time?

Xander Snyder - The water flowing into the bathtub is new distress, for example, a property owner who has recently defaulted or cannot service their debt. The level of water in the tub is the total amount of distress in the market. The water draining out is sales activity.

Odeta Kushi - So if higher rates cause more distress, the faucet is on full blast. If there is little sales activity, the drain is clogged and the tub fills up.

Xander Snyder - Exactly. The total water level rises because the drain is blocked. Transaction volume has been low, but recently that drain seems to be opening. As sales pick up and prices fall enough to entice buyers, more distress drains out of the tub. Even though new distress is still flowing in, the total level is not likely to rise much further.

Odeta Kushi - So distress is not disappearing, but the system is finding balance again. That recovery in sales has been modest though, right?

Xander Snyder - So far, yes. In the second quarter of 2025, commercial property transaction volume rose about 8 billion dollars from the first quarter, an 8.5 percent increase. Compared to a year ago, it is up 6 billion dollars, or 6.3 percent. It is growing, but modestly.

Odeta Kushi - So we are not out of the woods yet, but prices have fallen enough to make distressed deals more appealing. That has led to a quarter-over-quarter decrease in the total balance of outstanding commercial real estate debt for the first time in a while.

Xander Snyder - Exactly. Distressed sales as a share of all transactions have been rising modestly, even though they remain well below post-Financial Crisis levels. That is another encouraging sign.

Odeta Kushi - How are delinquency rates looking in other asset classes?

Xander Snyder - Let’s look at multifamily. Delinquency rates for private-label CMBS, which exclude agency loans, have been rising since early 2024 and hit 6.6 percent in September.

Odeta Kushi - Why separate agency loans?

Xander Snyder - Agency loans are insured by Fannie Mae or Freddie Mac and have stricter underwriting standards, so their delinquency rates are much lower, a little under 2 percent when you include them.

Odeta Kushi - That higher rate for non-agency multifamily is interesting since multifamily fundamentals differ from office. We still have a housing shortage.

Xander Snyder - True, but financing challenges have been mounting. Many investors took out floating-rate bridge loans when rates were low, expecting to refinance later. Those loans are now much costlier, and their interest-rate caps, which usually last around three years, are expiring. Projects that underperformed or have not finished are leaving borrowers stuck.

Odeta Kushi - And how is that showing up in the data?

Xander Snyder - You can see it in the collateralized loan obligation, or CLO, segment of commercial debt. CLOs are usually floating-rate, and if you look at those originated between 2020 and 2022, their delinquency rates are between 11 and 14 percent, much higher than fixed-rate CMBS from the same period.

Odeta Kushi - If only we had DeLoreans to take us back to the low-rate days of 2021 and lock in a fixed mortgage.

Xander Snyder - Boom, 1980s reference.

Odeta Kushi - See that, Mark? You have influenced me, now I am making 80s references on my own.

Xander Snyder - He has done it. But yes, those low rates were nice, though 2021 had its own downsides with the Delta variant.

Odeta Kushi - Tough times indeed. I am usually the Debbie Downturn here, but today you might have taken my spot. On the fundamentals side of multifamily, a wave of new supply is hitting the market, pushing rents down or slowing growth in some cities. While that oversupply is likely temporary, given that permits and construction starts are falling, the combination of softer rent growth and higher interest expenses is squeezing cash flows, especially for those who bought at peak prices with floating-rate debt.

Xander Snyder - Exactly. Multifamily delinquencies may keep rising a bit longer as 2021 and 2022 investments start to struggle, but we are probably close to the peak.

Odeta Kushi - Okay, so we have covered office and multifamily. What about retail?

Xander Snyder - Retail is a different story. Retail delinquency rates hover around 6.5 percent and have been elevated for years due to long-term trends such as e-commerce and the decline of mall culture, the so-called retail apocalypse.

Odeta Kushi - Right, the retail apocalypse.

Xander Snyder - Exactly. That high delinquency rate mostly comes from weaker malls with high vacancy rates. But because very little new retail space has been built in the last 15 years, segments like grocery-anchored centers or experiential retail, places where you actually need to visit physically, are performing much better. That is why the overall retail delinquency rate has been gradually declining.

Odeta Kushi - So some recovery there too. Earlier we talked about CMBS as a proxy for broader market distress. How accurate is that picture?

Xander Snyder - You can also look at loans held by banks. Those delinquency rates are rising too, but they are much lower, around 1.3 percent. Smaller banks with heavy commercial real estate exposure often use what is called amend and extend, or less kindly, amend and pretend. That allows them to delay recognizing losses and buy time for a property to recover, which is not always a bad thing if the property has solid long-term prospects.

Odeta Kushi - So to sum it up, flattening delinquency rates in office and retail, rising but near-peak multifamily distress, and modest bank exposure all hint that we may be close to peak distress.

Xander Snyder - I would say we are near or very close to the top, depending on the asset class. New distress will still appear as a wave of commercial real estate debt matures through 2026, but as sales pick up and that drain opens, the market’s ability to absorb it will improve.

Odeta Kushi - Not out of the woods yet, but getting better, and another bathtub analogy in the books. I will take it. Thank you for joining us today, Xander, and thank you all for tuning in to this episode of The REconomy Podcast. If you have an economics-related question for us, email economics@firstam.com. If you cannot wait for the next episode, follow us on X. I’m @OdetaKushi and Xander is @XanderSnyderX. Until next time.

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