CRE Braces For 2025 Amid Conflicting Predictions On Market Stability
As 2025 approaches in less than two weeks, there’s growing pressure to make definitive predictions about the future of commercial real estate—its direction, timeline, and the potential winners and losers. However, this is a challenging task that may not have a clear answer. While some signals may suggest pessimism or optimism, a more measured approach involving planning and flexibility could be the best strategy.
From a pessimistic perspective, Bloomberg’s outlook reflects a sense that doom is catching up with the commercial real estate sector.
Tim Mooney, head of real estate at Värde Partners, stated, “I look at 2025 as a year of reckoning,” predicting that lenders and borrowers will realize that lower interest rates won’t provide relief.
There are certainly challenges in the market, as over 10% of CMBS loans for office buildings are delinquent. Many real estate owners have used short-term debt with interest-only payments and large balloon payments due later, which could pose significant issues as rising borrowing costs reduce valuations. Bloomberg also referenced data from MSCI showing average declines of 23% for offices and 20% for residential buildings since 2022.
However, this data, from March 2023, is now outdated, as the market has changed significantly since then. The comparisons to 2022 also fail to account for the inflated values from that period, driven by a flood of capital seeking higher returns than fixed-income investments. Furthermore, CMBS data represents only one aspect of the broader commercial real estate landscape.
On the other hand, recent data offers a more optimistic view. A report from Moody’s highlighted an increase in bank loan modifications, often referred to as the “extend-and-pretend” practice. For U.S. banks with over $100 billion in assets, the percentage of loan modifications rose in the third quarter of 2024. Specifically, banks with assets between $100 billion and $700 billion saw a 61% increase in modifications, and even smaller banks experienced substantial jumps. While this reflects added risk, it does not suggest a market on the brink of collapse.
Additionally, Valley National Bank recently sold nearly $1 billion in CRE loans to Brookfield Asset Management at only a 1% discount, a move that doesn’t suggest desperation. Nathan Stovall from S&P Global Market Intelligence noted that while there has been some purging of portfolios, the losses are modest, with only 5% to 10% haircuts on portfolios.
While some property owners may need assistance in 2025, this will not apply to the entire market. Much of the negative news is based on percentages of total loans, not the number of loans or properties themselves. There is still plenty of potential in commercial real estate, making next year an ideal time for careful planning and attention to economic developments.
Source: GlobeSt.
