The U.S. commercial mortgage-backed securities (CMBS) market is confronting renewed pressure. The default rate surged to a multi-year high in March, with delinquency rates for four major property types—hotels, office buildings, retail spaces, and multifamily housing—all rising simultaneously. The financial reserves that have helped sustain the market are now depleting at an accelerated pace.
According to the March CMBS monthly report from real estate data firm Trepp, the default rate climbed by 41 basis points from the previous month to 7.55%, reaching its highest level in recent years. The hotel sector led this increase, with its default rate jumping 137 basis points in a single month to 7.31%—a segment previously considered relatively stable.
Meanwhile, as reported by The Wall Street Journal, the U.S. office market is experiencing a wave of distressed sales with discounts as steep as 90% or more, as property owners and lenders finally concede losses after years of struggling to hold on.
Data from MSCI shows that 204 troubled office buildings were sold nationwide in 2025, a significant increase from the 133 sold in 2024, with total sales reaching $5.2 billion. In the first two months of this year, sales of distressed office properties continued to rise, growing 24.5% year-over-year.
Market participants warn that as more loans mature and reserves are exhausted, this selling spree may only be in its early stages.
Defaults Widen Across Sectors, Underlying Stress Intensifies
Trepp data indicates that newly delinquent loans in March totaled approximately $5.1 billion. The five largest newly defaulted loans alone exceeded $2 billion, covering a West Coast hotel portfolio, a Midwest office loan, a Northeast retail center loan, a national hotel portfolio, and an office complex in the Pacific Northwest.
Breaking down by property type:
- The hotel default rate surged 137 basis points to 7.31%, marking the first time in nearly a year it has exceeded 7%. - The office default rate rose 51 basis points to 11.71%. Although slightly below the peak of 12.34% seen in January, it remains within a historically high range. - The retail default rate increased by 32 basis points to 6.62%. - The multifamily housing default rate climbed 30 basis points to 7.15%, slightly surpassing the previous high of 7.12% from October 2025 and significantly higher than the 5.44% rate a year ago and 1.84% two years prior. - Industrial properties—including warehouses and data center REITs—saw their default rate edge down to 0.65%, remaining an outlier among major property types.
More alarmingly, if loans that are past maturity but still making interest payments are included, the comprehensive default rate for March rises to 9.07%, up 32 basis points from February and 152 basis points higher than the officially reported 7.55%.
The serious delinquency rate for loans 60 days or more past due (including those in foreclosure or real estate owned by banks) also increased from 6.89% to 7.29%. Trepp noted that approximately 40% of the loans that became delinquent in March were still current the previous month, revealing a recurring cycle of "maturity-delinquency-cure-re-delinquency" pressure.
Office Building "Fire Sales": Six Years of Waiting Ends in Capitulation
The unwinding of the office market is proceeding with discounts that have stunned the industry.
- In Chicago, a 485,000-square-foot office building was purchased by real estate developer Marc Calabria for $4 million—a fraction of its $68.1 million sale price a decade ago. - Developer Asher Luzzatto acquired the Denver Energy Center, a two-building complex, for $5.3 million through foreclosure. The property had sold for $176 million in 2013. - Last month, the U.S. General Services Administration (GSA) sold a 940,000-square-foot federal office building for $24 million, a mere sliver of its valuation from just a few years prior.
"People who don't understand real estate would be shocked by the level of distress," Luzzatto commented.
Jim Costello, an executive director at MSCI, pointed out that the journey from the initial shock of the COVID-19 pandemic to the current state of capitulation has taken a full six years: "But that's the time it takes for people to give up on a high-value asset."
According to analysis firm Green Street, even higher-quality office properties have seen their valuations decline by an average of approximately 35% from their peaks.
Property owners face a confluence of pressures: remote work has weakened leasing demand, leasing costs remain high (including broker commissions and tenant incentives), persistently high interest rates are depressing property values, and the rise of AI poses a threat to office employment. This combination of factors makes a substantial market rebound unlikely.
Surge in Office-to-Residential and Other Conversions
Extremely low prices are spurring a wave of non-traditional development approaches.
- Marc Calabria plans to convert his newly acquired Chicago office building into an urban farm and educational center, partnering with Farmzero to use grow lights and hydroponics to produce millions of pounds of fruits and vegetables annually. - Hossein Fateh, who purchased the former GSA building in Washington D.C., intends to convert it into residential units. The plan involves adding features like a swimming pool or atrium to introduce natural light, with conversion costs estimated in the hundreds of millions of dollars. "At a higher price, this deal wouldn't have been feasible," he stated. - Credit investment firm Cross Ocean Partners, which specializes in distressed assets, is preparing a $750 million fund to acquire debt and equity in troubled office properties. It has already completed a first close of $300 million. Their strategy centers on purchasing assets at deep discounts and profiting from the cash flow generated by existing leases.
According to RentCafe, over 90,000 apartment units across the U.S. were in the process of being converted from office space at the start of this year, a 28% increase year-over-year. New York City leads this trend, aided by tax incentives, with Chicago and Washington D.C. also following suit.
Systemic Risk Contained, But Turnaround Not Yet in Sight
For now, the stress in the commercial real estate sector does not appear to pose a systemic financial risk.
Banks and other lenders, having spent years repairing their balance sheets and building loss reserves, are better positioned to absorb losses. Special servicers managing troubled office CMBS are also continuing to sell off assets.
However, warnings from market participants cannot be ignored. The reserve funds that have kept the CMBS market in a state of suspended animation for years are nearly depleted. The wave of loan maturities is far from over. Furthermore, the widespread adoption of artificial intelligence could trigger another contraction in office space demand.
The accelerating default rates already observed in the hotel and multifamily sectors, coupled with the underlying pressure indicated by the 9.07% "broad default rate," suggest that the market's adjustment process is still underway and not nearing its conclusion.
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