What’s Next for Commercial Real Estate in 2025?

If you were able to hang on to your asset, then you “Survived until ‘25”.  2024 was a year of restarting the CRE financing engine after a 3-year post-Covid hiatus. Now, what’s ahead?

The following are my predictions for 2025, based on observations from CMBS loan resolutions on loans we advised on, industry conferences that I attended or spoke on panel, insights from market professionals during my travel to over 20 US cities, Trepp, CredIQ, and CoStar analysis, and broader economic indicators.

Predictions for 2025

From 2020 to mid 2024 the market saw limited activity in CRE financing and sales transactions. Mid 2024 marked the noticeable movement in financing markets, driven primarily by CMBS, private lenders, and some activity from balance sheet lenders. For example, through Q2 2024, only three SASB (Single Asset Single Borrower) office loan securitizations were completed. Since then, the SASB pipeline is significantly increasing with notable deals such as the $3.5B Rockefeller Center being successfully refinanced.

By late 2024, CMBS lending volumes were experiencing significant growth, as lower-leverage, high-quality assets—traditionally financed by balance sheet lenders—shifted toward CMBS as financing options are limited. The majority of CMBS activity centered on SASB loans. CMBS conduit lending grew at a brisk pace, however, these loans are reserved for higher quality, stabilized properties with limited tenant rollover and strong markets. In addition, CMBS lenders now require pre-approval from B-piece buyers before closing new loans which means the loan terms may change before loan closing.

The balance of the CRE landscape remains challenged, with owners facing rising costs across labor, operations, insurance, taxes, and interest rates there is pressure from balance sheet lenders to move these loans off their books. In certain instances, Lenders are refusing to take back the underperforming asset exposing the Borrower to recourse risk.

Office and Hotel loans are particularly vulnerable in the current environment due to limited capacity for balance sheet lenders and CMBS pool concentration limits. While many multifamily loans require cash in refinancing from their current over leveraged positions borrowers must come to terms if it is feasible to do a cash in refinance.

CMBS and CLO delinquency rates have steadily increased as properties fail loan covenant tests and maturity defaults signaling the beginning of a significant wave of distress, especially in the multifamily asset class. While optimism exists for certain asset classes—such as retail, Class A and medical office buildings, data centers, and lower-leverage, high-quality assets—2025 is expected to bring continued challenges for underperforming and over leveraged properties.

CMBS Loan Delinquencies

Office Loans

• Moody’s CRE forecasts office vacancy rates peaking in late 2025 or early 2026. The trajectory for the office sector will be uneven, with some recovery driven by net absorption turning positive after seven quarters of decline.
• While Class A office valuations bottomed in Q1 2024, Class B and lower-tier buildings will face continued challenges, likely bottoming out in 2026 or beyond.
• Loan modifications and extensions will exist for borrowers capable of repositioning assets. A/B note structures will more commonly emerge, enabling lenders to share future profits from asset sales or refinancing to offset current losses.
• Select office buildings will be converted to multifamily use as local governments relax zoning and use restrictions, though these conversions will require significant discounts on existing office loans and are viable only for a subset of properties.
• Obsolete office buildings may require capital for upgrades, be sold for land value, or face demolition and site repurposing.

Multifamily Loans

• Despite fundamental strength, the multifamily sector is heavily over leveraged.
• CMBS delinquency rates for multifamily loans rose to 4.18% in 2024 from 2.46% in late 2024, with CRE-CLO bonds experiencing record-high distress rates.
• High interest rates will exacerbate delinquencies through 2025, and potential privatization of government-backed lending agencies could further strain the sector.
• Multifamily assets acquired in low cap rate environments during 2016-2020 are over leveraged and the lack of cap rate compression will challenge recovery.
• Acute distress in CLOs could force issuers to sell loans or, in some cases, cease operations entirely.

Hotel Loans

• CMBS delinquency rates for hotel loans stood at 7.24% in 2024 and are expected to rise in 2025 due to:
  • Higher operating and refinancing costs.
  • Franchisor-mandated deferred Property Improvement Plans (PIPs).
  • Expiring COVID-related loan extensions, requiring additional capital injections.
  • Limited refinancing options from lenders and CMBS pools.

There is limited capacity for balance sheet hotel loans, which will require a strong and profitable relationship with the balance sheet lender to obtain a loan. CMBS loans will be constrained in loan sizing which is  based on conservative Debt Yield tests and there are limitations of loan pool concentration for this asset class. While private lenders will size to a tighter debt yield the loan terms may be closer to a ‘Loan to Own’ type of debt.

Expect to see rising CMBS delinquencies in lower tier Full service, Limited Service in oversaturated markets and extended stay hotels.

CRE Sales and Transaction Volume

• Expect CRE loan rates to stabilize by Q3 2025, with average coupons for 10-year loans ranging between 4% and 7%.
• Sales volumes for CRE properties and loans should materially increase in Q3 and Q4 2025 as capital availability expands, particularly from private lenders.
• Traditional lenders will still be constrained with limited balance sheet capacity, pushing borrowers toward private capital with less favorable terms.
• Regulatory pressures and market stabilization will drive an increase in bank loan sales by mid-2025, with distressed assets likely sold to credit funds focused on foreclosure and asset acquisition.
• Rising foreclosures will peak in Q1 2026, as lenders become more inclined to pursue such exits given the improving sales market.

CMBS Loan Resolutions

• Programmatic approaches to loan workouts will become more common, favoring standardized solutions over tailored modifications. This is not optimal for Borrowers.
• To achieve optimal outcomes, borrowers should engage with servicers nine months before loan maturity as servicing volumes rapidly grow putting strain on the system.
• CMBS servicers face growing volumes and are incentivized to prolong loans in special servicing, making proactive borrower engagement critical.

Conclusion

As the market continues to transition in 2025, CRE values will stabilize, and distressed assets will set new cost bases for market absorption. Borrowers must remain proactive, demonstrate their ability to navigate challenges, and position themselves as reliable sponsors. BCA stands ready to assist borrowers through this pivotal period in the CRE market.

About Brighton Capital Advisors

Brighton Capital Advisors (BCA) is a boutique commercial mortgage-backed securities (CMBS) loan advisory firm focused on best-in-class service for select clientele. BCA is made up of a small, specialized group of CMBS professionals who possess in-depth knowledge of the intricacies of the CMBS servicing process and procedures. Our horizontal structure ensures organizational focus on client solutions and provides unparalleled access to an advisory team whose careers are centered on CMBS loan origination, closing, special servicing and large loan workouts. Our clients receive undivided attention from our purposely small deal team who are each fully involved in all aspects of the client assignment. BCA’s high rate of success is derived from our ability to anticipate and address servicer concerns and effectively communicate with the various business, legal, risk and rating agency parties. Also, our longstanding relationships with CMBS servicing decision makers allows us to keep abreast of the changes in what is a highly dynamic environment. BCA understands the importance of a client’s relationship with counsel and works closely with all client parties to ensure comprehensive, streamline negotiations. BCA is highly recommended by major law firms.

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