The commercial real estate sector is heading towards a critical juncture in 2025, as rising interest rates and shrinking lender patience push the industry to confront long-avoided challenges.
Despite earlier hopes that the economic environment would improve, high borrowing costs and declining property values have left many owners struggling to refinance loans.
Rising Delinquencies Highlight Industry Troubles
In November, US delinquencies surged, with over 10% of loans on office properties in arrears, according to Bloomberg’s analysis of commercial mortgage-backed security data.
Some property owners, such as Cannon Hill Capital Partners and Pimco’s Columbia Property Trust, have already offloaded assets below mortgage values.
Post-Pandemic Struggles Amplified by Interest Rates
The pandemic dealt a significant blow to office spaces, with remote work reducing demand. This was exacerbated by the rapid rise in interest rates, which made refinancing more costly and caused property values to plummet.
MSCI data shows office valuations have dropped by an average of 23% since 2022, while residential properties fell by 20%.
“Extend and Pretend” vs. Reality
Many lenders have opted to delay addressing these issues by extending loan terms, a strategy nicknamed “extend and pretend.”
However, unlike the 2008 financial crisis, higher interest rates now leave banks less willing to indefinitely defer repayments. Instead, lenders are demanding concessions or adopting an “amend and extend” approach.
High-Stakes Examples of Market Pressures
Brookfield Asset Management, for instance, negotiated a 12-month extension for loans on Citypoint, a London office building. Despite these efforts, bids for the property have fallen significantly below its purchase price.
Compounding the problem, tenants are increasingly demanding environmentally upgraded and modernised spaces, which require further investments amid rising construction costs.
Challenges Loom Large in the US and Europe
In the US, smaller banks with high exposure to commercial mortgages face mounting pressure, as Federal Reserve researchers highlight the risks of extending problematic loans.
European regulators, meanwhile, are urging banks to adjust loan valuations to reflect falling property prices.
The Path Forward: 2025 as a Pivotal Year
With billions in commercial real estate loans maturing over the next few years, the industry faces tough choices.
Borrowers must either secure costly refinancing or offload properties at significant discounts. Central banks could potentially intervene with interest rate cuts, but no such moves appear imminent.
Experts like Tim Mooney of Värde Partners and Alex Killick of CWCapital predict that 2025 will bring a wave of market corrections. While the industry avoided liquidating assets during the worst of 2023, deferring action hasn’t solved its fundamental problems
