The landscape of commercial real estate finance is shifting, and nowhere is this more apparent than in the world of office-backed commercial mortgage-backed securities. According to a recent study released by KBRA, the surge in CMBS 2.0 office issuance has brought both improvements in credit quality and a persistent sense of uncertainty that continues to cloud the sector.
Office properties have long been a cornerstone of the commercial real estate market, and their significance extends deeply into the fabric of CMBS lending. As KBRA notes, office assets have served as collateral for roughly a quarter of all CMBS 2.0 loans—spanning both conduit and single-asset, single-borrower (SASB) deals—between 2012 and 2019. The onset of the pandemic only amplified this trend, with office properties swelling to comprise a third of all deals as lenders pulled back from the riskier waters of retail and lodging.
Yet, the office sector’s prominence has not insulated it from headwinds. In March 2025, CRED iQ reported that while distress levels had fallen across most property and loan types—including those backed by Freddie Mac, Fannie Mae, Ginnie Mae, and CRE CLO—office loans remained the exception. By April, office-backed loans were still the most distressed in the market, and new challenges such as tariffs and trade wars began to weigh on the sector.
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This distress has sometimes affected even those buildings that had previously performed well. Properties acquired during 2021 and early 2022 likely benefited from low floating-rate loans and high leverage, but with those shorter-term loans now coming due, borrowers are facing a very different interest rate environment. Rates have climbed sharply, and longer-term borrowing costs are now subject to the volatility of the 10-year yield, which has hovered above 4% for much of the past month.
Despite these challenges, KBRA observed that the current year began with a glimmer of optimism. The first quarter of 2025 saw 36.4% of all newly originated CMBS backed by office properties. However, as remote and hybrid work arrangements became more entrenched, the share of office-backed CMBS began to decline.
Still, the asset class' exposure within CMBS conduits has shown some resilience, rising to 16.3% in the first quarter of 2025, up from 13.9% a year earlier and 15.4% for the whole of 2024. The market for vintage conduit office assets has also become more concentrated in primary, or tier 1 markets, which accounted for 72% of 2024 issuance and a striking 82% in the first quarter of 2025. New York City and Los Angeles continue to dominate as the top metro areas for office CMBS, while San Francisco’s share has waned under the weight of ongoing remote work trends.
The nature of office CMBS financings is evolving as well. Acquisitions, which once made up a third of all office CMBS deals, fell by half in early 2024. In their place, recapitalizations have become more common as owners seek to refinance and lenders look to shed troubled loans from their balance sheets.
Another notable trend is the increasing prevalence of newer office buildings in CMBS portfolios. Properties built after 2000 now make up nearly half of all the sector's assets in recent deals—twice the historical average of 25%.
While the office sector remains a vital pillar of commercial real estate and CMBS, the path forward is anything but certain. As KBRA and CRED iQ both highlight, credit quality may be improving, but the sector still faces a complex web of challenges that will require careful navigation in the months ahead.
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