📢 Good morning,

Distress has shifted into “lower gear”: in Q2 2025, resolutions exceeded newly identified trouble even as CMBS delinquency ticked up again.

Context: MSCI reports Q2 saw net improvement after Q1’s $116.4B distress balance and renewed additions; meanwhile, Trepp’s August CMBS delinquency rose to 7.29% and “matured-but-current” loans would push a shadow rate to 9.31%. Banks show contained strain: FDIC data flags elevated PDNA in non-owner-occupied CRE at large banks but below late-2024 peaks, consistent with ongoing workouts. The 2025 maturity wall of ~$957B forces extensions, paydowns, and A/B notes rather than fire sales.

Returns / Performance Trends
Realized distress remains concentrated but is not accelerating. MSCI’s tracker shows Q1 net additions, then Q2 net resolutions, implying price discovery is improving with fewer forced sales. Public credit metrics lag the turn: CMBS delinquency rose again in August, reflecting “limbo” loans moving into default as extensions expire. For stabilized, high-quality assets, carry is holding; weaker office and certain lease-up multifamily cohorts drive most impairments.

Lending / Capital Conditions
Regulators explicitly encourage prudent workouts. The 2023 interagency policy frames extensions, rate concessions, and A/B structures as acceptable for creditworthy borrowers, reducing pressure for fire sales and enabling time-to-heal strategies. Bank data corroborate: asset quality is “generally favorable,” though PDNA remains elevated in non-owner-occupied CRE, especially at large banks. Reserve coverage is robust by historical standards.

Transaction Activity & Investor Flows
Distressed-sale share has risen from trough levels but stays modest; investors with dry powder target note purchases and recapitalizations rather than REO. In securitized markets, continued special-servicing elevation signals ongoing triage, but SASB funding windows for prime collateral remain open, channeling liquidity to winners and starving marginal assets.

Broader Implications
The 2025 maturity wall is the main catalyst. MBA tallies ~$957B maturing with heavier 2025 exposure in hotels and office. Outcomes split three ways: (1) extend-and-amend with equity top-ups; (2) partial paydowns plus mezz/ pref; (3) transfers to special servicing and, selectively, note sales. As rates ease, cure rates should improve, but underwriting remains conservative on DSCR and debt yield, keeping leverage down.

Institutional Lens: Emphasize liability management. For 2025 maturities, prioritize extend-and-amend backed by fresh equity and interest reserves. Underwriting must clear today’s DSCR at coupon with exit cap > entry cap. For securitized debt, early servicer engagement plus credible lease-up and capex plans improve extension odds. Allocate capital toward SASB-eligible assets for refinancing optionality; use mezz/ pref to right-size capital stacks.

Operator’s Lens: Tactically line up two tracks per asset: an extension package (cash-in, TI/LC budget, rate cap) and a fallback recap (mezz/ preferred). Lock vendor diligence now—updated appraisals, PCA, ESA—to accelerate approvals. On loans with weak DSCR, negotiate A/B splits and cash sweeps rather than chase uneconomic sale pricing in thin markets.