Big Picture for Commercial Real Estate in 2025: Weathering the Storm

The commercial real estate (CRE) market remains under stress, but it seems likely that losses from CRE loans will surface over the next few years, rather than all at once as some have feared. The market's mettle will be tested as many borrowers seek to refinance loans maturing in the next year. Interest rates are unlikely to fall enough to reach the same levels as when the loans were originated, resulting in a higher debt service for borrowers, if credit is available at all. Concerns about the office real estate sector remain high, particularly for older buildings where few employees have returned to work in person. High interest rates, low valuations and increased scrutiny of the sector will prove worrisome for the coming quarters. The investment and regulatory community continue to heavily scrutinize banks with outsized exposure to the CRE market, as the asset quality of loans tied to the market slips further. However, the performance of CRE subcategories has varied greatly, and that separation should continue, as not all exposures are created equal. Stock prices of US banks with elevated CRE exposures significantly underperformed the rest of the bank industry in 2024, though the gap narrowed in the second half of the year as the Fed inched closer to cutting interest rates. The life insurance industry's holdings of mortgage loans hit new absolute and relative highs in the second quarter of 2024, with carriers continuing to emphasize the addition of industrial and multifamily loans as well as residential mortgages. 

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