This year's rapid interest rate hikes, combined with cap rate movements, put the squeeze on commercial real estate, with about $5.5B, or 28% of new CMBS issuance, suffering from negative leverage during the third quarter of 2022, according to a report by Moody’s Analytics.

For those deals, the cost of debt exceeds projected returns on investment.

The amount of CMBS exhibiting negative leverage was only 8% in the second quarter of this year, Moody's noted. During Q3 2021, the total was a mere 2%.

The third-quarter jump was seen across asset classes, but industrial and multifamily have the largest share by count, at 35.9% and 30.8%, respectively, Moody's reported.

Negative leverage will produce a cascade of ill effects on commercial properties, most immediately lower loan-to-value ratios and a slowdown in lending and trading volume. Eventually, the trend will lead to downward pressure on asset values, according to Moody's.

“Ultimately, negative leverage will drive bid prices lower,” Kevin Fagan, head of commercial real estate economic analysis for Moody’s, told Bloomberg.

CMBS loan interest rates grew between 75 and 175 basis points between the first and third quarters of 2022. At the same time, multifamily cap rates were down slightly in Q3, but there was a moderate increase for industrial, office and retail assets.