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INSIGHTi
COVID-19 Impact on Commercial Real Estate
and Commercial Mortgage-Backed Securities
June 19, 2020
The economic turmoil resulting from Coronavirus Disease 2019 (COVID-19)—particularly business
interruptions and the decline in consumer activity—has negatively affected commercial real estate in
numerous ways, leading to a sharp increase in delinquencies among commercial mortgage-backed
securities (CMBS) borrowers in the past month. This Insight provides a brief overview of the commercial
real estate (CRE) market, as wel as some policy issues that may be of interest to Congress.
Overview of Commercial Real Estate Financing
The CRE market is large and complex. Because private companies own or lease most of the properties,
valuing the market is difficult—but industry analysis suggests that outstanding CRE debt is around $3
tril ion. As seen in Figure 1, banks are the largest lenders of CRE mortgages, but nonbank financial
institutions, such as life insurance companies and CMBS lenders, also play a significant role. The general
distinction between CRE mortgages and residential mortgages is the commercial use of CRE properties,
meaning that they wil be used for generating income rather than being used as a residence. Borrowers
can be individuals or corporations looking to buy space to rent out to retailers or use for their own smal
businesses; corporations that want office space for their employees or factories for production; or
investors buying multifamily apartment complexes with the hope of generating rent from the buildings’
residents. CRE comprises many subsectors, including office and industrial space, retail storefronts,
apartments, hotels, health care facilities, and other specialty properties (e.g., sports venues, storage units,
and data centers).
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CRS INSIGHT
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Figure 1. Outstanding Commercial Real Estate Debt
by lending institution share
Source: Mortgage Bankers Association, Role of CMBS in the Financing of Commercial and Multifamily Real Estate in America,
October 2019, p. 11.
What Is the Role of Commercial Mortgage-Backed Securities?
One way borrowers can access funding for CRE is through a CMBS loan (known as a “conduit” loan),
which is a CRE mortgage designed to be securitized and sold in the secondary market. CMBS loans are
attractive to borrowers because they can carry lower rates than traditional CRE mortgages and al ow
borrowers flexibility in transferring or prepaying their mortgage. Some financial institutions specialize in
making CMBS loans to borrowers and sel ing them to investors. Typical y, life insurance companies,
pension funds, money managers, mutual funds, and commercial banks invest in CMBS products.
Figure 1 shows that private securities backed by commercial mortgages and real estate comprise around
14% of the total CRE lending market. Mortgage-backed securities (MBS) for CRE constitute over a third
of the market after adding the multifamily (i.e., properties with five or more residential units) portfolios
and securitized issuances from Fannie Mae and Freddie Mac (collectively referred to as the government-
sponsored enterprises, or GSEs) and Ginnie Mae.
What Is the Federal Role in Commercial Real Estate Finance?
Some federal agencies guarantee, insure, or securitize certain types of CRE loans. For example, the U.S.
Smal Business Administration (SBA) has programs that guarantee repayment of portions of eligible
smal commercial loans designed for fixed asset investments—which can include machinery or CRE. The
Federal Housing Administration (FHA) insures certain multifamily loans. The U.S. Department of
Agriculture (USDA) guarantees (and can issue) rural multifamily loans. Ginnie Mae securitizes these
FHA and USDA loans. Additional y, the GSEs have lending programs focusing on multifamily housing.
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Policy Issues for Congress
Commercial Real Estate Mortgage Servicer Liquidity
Federal bank regulators have issued considerable guidance and statements on how banks that service
consumer loans and residential mortgages can work with customers during the pandemic, including by
offering forbearance to those having trouble meeting their financial obligations. Under the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136), borrowers with federal y-backed
mortgages are given the right to request temporary forbearance on their loans. Multifamily residential
loans securitized by the GSEs and Ginnie Mae are considered “federal y-backed loans” under the CARES
Act. This has placed some strain on mortgage servicers, which are responsible for remitting payments to
lenders and investors regardless of whether they receive payments from borrowers. In April, the Federal
Housing Finance Agency (FHFA) issued a statement that limited the obligation of servicers to advance up
to four months of payments on loans in forbearance; this applies to single-family housing and does not
include multifamily units. (Ginnie Mae implemented provisions to provide liquidity to servicers for both
single- and multifamily properties.) Additional y, the Health and Economic Recovery Omnibus
Emergency Solutions Act (HEROES Act; H.R. 6800), which passed the House on May 15, 2020, would
expand access to the Federal Reserve’s liquidity facilities to mortgage servicers of federal y-backed loans,
including multifamily loans.
CMBS mortgage servicing is more complex than residential mortgage servicing, with multiple servicers
having sometimes competing interests. CMBS loan servicing duties are divided among three types of
servicers: the master servicer responsible for executing the contracts of the CMBS; subservicers
responsible for ensuring payments from the underlying mortgage borrowers; and special servicers
appointed to manage defaults and loss-mitigation procedures. Policies aimed at liquidity for CRE and
CMBS mortgage servicing may need to take into account this fragmentation.
Commercial Real Estate Market Intervention
Nonresidential CRE policy considerations differ from those pertaining to residential mortgages, where a
primary policy goal is often to reduce the number of families who lose their homes. In the CRE market,
the policy questions focus more on to what extent federal intervention should mitigate losses that would
otherwise be borne by the private sector, in the hopes of avoiding potential future systemic risks. The
Federal Reserve is purchasing federal y-backed CMBS and supporting other CMBS through the Term
Asset Backed Securities Loan Facility, as part of its response to COVID-19. However, a prolonged
economic downturn resulting from depressed economic activity in retail space, restaurants, hotels, and
other key parts of the CRE market may result in greater losses that these initiatives can addressed, raising
the question of whether further policy intervention is needed.
Author Information
Andrew P. Scott
Analyst in Financial Economics
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Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
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