“Liberation Day” showers followed by May Flowers

Non-Agency CMBS Market Overview

After a significant pullback in April due to the “Liberation Day” announcement of sweeping global tariffs that ignited a global trade war followed by the subsequent ebbs and flows as the market absorbed policies that seemed to change on a daily basis, May Non-Agency CMBS issuance bloomed as the market demonstrated remarkable resilience. Total issuance for May reached $10.2 billion from 14 deals, representing a robust recovery from April’s volatility. Investors worked overtime digesting the substantial new supply, but market reception remained constructive with spreads pricing in line with previous tights, signaling strong underlying demand despite the macroeconomic headwinds.

Source: Commercial Mortgage Alert, Morningstar Credit

May’s impressive issuance figures bring total 2025 volumes to over $51 billion through month-end, substantially exceeding 2024’s comparable period by almost 40% ($37 billion), showcasing the market’s fundamental strength and adaptability in navigating challenging conditions.

Source: Commercial Mortgage Alert, Morningstar Credit

As anticipated last month, a significant portion of May’s supply originated from deals that had been scheduled for April market entry but were delayed due to the volatile conditions surrounding the tariff announcements. The encouraging development is that originators successfully replenished their pipelines throughout May, with the forward-looking calendar appearing exceptionally robust. Commercial Mortgage Alert reports 15 new deals are queued for the coming months, further evidencing the market’s underlying momentum and issuer confidence.

Deal Composition Analysis

Single Asset Single Borrower (SASB)

Continuing the established trend of recent months, SASB deals dominated with 10 of the 14 transactions that priced in May, accounting for approximately $7.8 billion of monthly issuance. Year-to-date, SASB issuance represents more than 70% of total volume, surpassing even 2024’s substantial share where SASB comprised roughly two-thirds of issuance. This trend reflects investors’ continued preference for concentrated exposure to high-quality, large-scale commercial real estate assets.

Conduit Deals

May witnessed 4 conduit deals reaching market totaling approximately $2.45 billion with generally strong execution metrics. However, a concerning trend emerged in the form of declining average deal sizes, which averaged roughly $610 million as issuers continue struggling to achieve more substantial transaction scales. The latest offering from the BANK shelf, 2025-BNK50, closed at $493 million, representing one of the smallest conduit deals in recent market history and highlighting the ongoing challenges in loan aggregation.

Source: Commercial Mortgage Alert, Morningstar Credit

CRE CLO Market

CRE CLOs continued their extraordinary year with 5 managed pools pricing in May for approximately $4.9 billion, demonstrating robust demand across the capital stack. This performance brings total 2025 CRE CLO issuance to over $15.3 billion, slightly exceeding the combined issuance volumes of 2023 and 2024. The CRE CLO market’s momentum reflects both manager expertise in navigating current market conditions and investor appetite for diversified commercial real estate credit exposure.

Source: Commercial Mortgage Alert, Morningstar Credit

Market Analysis and Outlook

Credit and Spread Environment

Despite the strong issuance volumes, the CMBS market faces mounting credit pressures. CMBS spreads are expected to exhibit some volatility yet continue to tighten over the coming months, reflecting a complex interplay between improving market sentiment and underlying credit concerns. The market has priced CMBSs relatively inexpensively compared to corporates, making them an attractive investment from a relative value perspective.

Underwriting Standards and Asset Quality

Despite rising delinquencies, the quality of assets securing new loans remains solid, partly due to tightened underwriting standards, which have been a hallmark of the recent issuance environment. The dichotomy between seasoned loan performance and new issuance quality reflects the market’s evolutionary response to lessons learned from previous cycles.

Interest Rate Impact

The Federal Reserve’s monetary policy stance continues to influence CMBS dynamics significantly. Refinancing has dominated issuance in recent months, reflecting demand for better loan terms amid falling rates and signaling confidence in credit quality. However, borrowers face challenges as higher interest rates and falling property values make many borrowers struggle to refinance or meet loan terms.

Property Sector Divergence

The market exhibits stark performance variations across property types. Office properties face the most severe stress, with vacancy rates and structural challenges creating ongoing headwinds. Conversely, industrial and multifamily sectors, while experiencing some pressure, continue demonstrating relative resilience. Market experts predict that issuance volumes in 2025 will likely surpass 2024 levels, driven largely by acquisition financing as rate cuts lower borrowing costs.

Global Economic Context

The “Liberation Day” tariff announcement created significant market disruption in April, with the announcement marking the beginning of a global trade war and triggering a global stock market crash. While Trump announced a 90-day pause on new tariffs for most countries just hours after they went into effect, causing global stock markets to shoot back up, the episode highlighted the CMBS market’s sensitivity to broader macroeconomic policy shifts.

Forward-Looking Considerations

Several factors will likely influence CMBS market performance through the remainder of 2025:

Positive Drivers:

• Strong pipeline of pending transactions suggests continued robust issuance
• Tightened underwriting standards supporting credit quality of new issuance
• Relative value attractiveness compared to corporate credit
• Renewed optimism in the CMBS markets as the sector’s recovery continues

Risk Factors:

• Rising delinquency rates expected as a lagging indicator of past economic turbulence, with rates likely increasing to higher single digits
• Continued office sector structural challenges
• Potential volatility from ongoing trade policy uncertainty
• Refinancing pressure for maturing loans in a higher rate environment

Conclusion

May 2025 represented a pivotal month for the Non-Agency CMBS market, demonstrating remarkable resilience following April’s “Liberation Day” disruption. The market’s ability to absorb $10.2 billion in new issuance while maintaining tight spread levels underscores the fundamental strength of investor demand and issuer execution capabilities.

Key takeaways from May’s performance:

1. Market Resilience Validated: The swift recovery from April’s volatility confirms the CMBS market’s structural stability and adaptability to external shocks.
2. SASB Dominance Continues: The overwhelming preference for single-asset transactions (70%+ of YTD volume) reflects investors’ desire for targeted exposure to high-quality assets.
3. CRE CLO Momentum Sustained: Record-setting CLO issuance demonstrates the market’s evolution toward more sophisticated risk management structures.
4. Credit Bifurcation Emerging: While new issuance maintains strong underwriting standards, seasoned loan performance shows concerning deterioration, particularly in office and multifamily sectors.

Looking ahead, the market faces a delicate balance between robust issuance demand and mounting credit pressures. The current landscape provides an appealing entry point into a market underpinned by strong assets and evolving opportunities, though investors must remain vigilant regarding sector-specific risks and broader macroeconomic uncertainties.

The strong forward calendar and continued spread tightening suggest that May’s “flowers” may indeed herald a sustained period of market growth, provided that credit concerns remain manageable and policy volatility subsides. With total 2025 issuance already exceeding 2024 levels by over one-third, the CMBS market appears well-positioned to achieve what may prove to be a post GFC record year for transaction volume, albeit one requiring careful navigation of evolving credit and policy landscapes.

The resilience demonstrated in May reinforces the CMBS market’s role as a critical component of commercial real estate financing, capable of adapting to challenging conditions while maintaining its essential function in the broader capital markets ecosystem.