With 2025 less than two weeks away, the pressure’s on for definitive takes on where commercial real estate is going, how long it will take to get there, and who the winners and losers are.
It’s a big ask that probably can’t be granted. There are signs to point at, whether you’re a pessimist or optimist. Maybe what’s needed is a third option of considered planning and flexibility.
Let’s start with pessimism. Bloomberg’s take seems to be doom finally catching up with reality.
“I look at 2025 as a year of reckoning,” Tim Mooney, head of real estate at Värde Partners, which invests in property debt told Bloomberg. “Lenders and borrowers will acknowledge that lower interest rates aren’t going to save them.”
There is certainly ugliness in the market. As they point out, more than 10% of CMBS loans on office buildings are delinquent. A lot of real estate owners have borrowed using short-term debt using interest-only payments with a large balloon payment at the end.
Those who went that route, particularly with adjustable-interest loans that were made within the last few years, are likely feeling the heat. There is only so far that lenders will kick the can down the road and increased borrowing costs lead to lower valuations. Bloomberg pointed to data from MSCI about “an average decline of 23% for offices and 20% for residential buildings since 2022.”
Except that data was from March 2023 and many things have changed. Plus, comparing values from 2022 misses that those numbers were highly inflated because of the flood of capital seeking better returns than fixed-income investments. And CMBS figures are only one part of the CRE capital markets puzzle.
The conclusion is a little too easy. Look at some data from the other side of the fence. Bank loan modifications — the extend-and-pretend practice — were up in the third quarter according to a recent Moody’s report.
They reviewed financial reporting disclosures for US banks that they rate with more than $100 billion in assets and any bank with CRE to tangible common equity above 150%. The data was for the first nine months of 2024 through September 30.
The median percentage of modifications for banks that had between $100 billion and $700 billion in assets was a 61% increase from 120 basis points to 193 basis points. For the largest banks, it was a 14% increase from 69 to 79 basis points. And for the smallest, it was a 217% spike from 10 to 32 basis points. Some noticeable jumps in percentage, but between 1.93% and 0.32% value of total loan values at banks needing modifications. Inconvenient? Sure. Added risk? Yes. On the crest of implosion? No.
Valley National Bank sold almost $1 billion in CRE loans to Brookfield Asset Management but at only a 1.0% discount earlier in the month. That doesn’t seem like a desperate move.
As Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, told GlobeSt.com early in December, “You’ve had a lot of money raised that banks would purge their portfolios. You’re seeing 5% to 10% of haircuts on overall portfolios and not a lot of those.”
Will some properties and owners need help in 2025? Absolutely. Is that the entire market? Not by a long distance. And much of the bad news is calculated and reported on percentages of total amounts in loans, not on the number of loans or properties themselves. There are likely a lot of possibilities in CRE next year. It’s a time to plan and keep a close eye on economic developments
Source: “CRE Braces for 2025 Amid Conflicting Predictions on Market Stability”
