Global commercial real estate loan market set for further turmoil in 2025

April 03, 2024 (MLN): Credit trends in global commercial real estate (CRE) loans will continue to deteriorate through 2025, which will impact commercial mortgage-backed securities (CMBS), banks, life insurance companies, non-bank financial institutions and public finance issuers, Fitch Ratings says.

Losses should remain within ratings expectations for most issuers, given the wide dispersion of risks within the financial system.

Floating-rate loans carry the highest credit risk given most CRE sectors have shed value over their typical maximum five-year term.

Weaker issuers with higher concentrations of riskier exposures could face downgrades. Lenders’ retreat from offices will exacerbate refinancing risk, adding to workout activity and credit losses.

Fitch forecasts the overall U.S. CMBS delinquency rate to reach 4.9% in 2025, up from 2.3% as of February. Three out of four U.S. conduit office loans maturing in 2024 are likely to default.

CRE valuation deterioration will be led by major U.S. and EMEA metropolitan office properties, with weakening also expected across U.S. retail, hotel, multifamily, and industrial segments. Office properties, particularly in major global metropolitan markets, have shed significant value since peak 2022 levels.

This will continue as leases are marked to market and tenants trim their physical footprints in response to the post-pandemic secular shift in work patterns and pivot towards well-located, highly amenitized and energy-efficient spaces.

Lower-quality and older vintage office properties should see the greatest risk from this reduced demand, and are likely to face outsized property value declines and even obsolescence.

This is already evident in some high-profile U.S. office markets and, increasingly, in gateway European cities with rising vacancies.

By percentage of assets and capital, small U.S. banks have significantly higher CRE concentrations than banks with over $100 billion in assets. This could result in the failure of a moderate number of predominantly smaller banks.

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