What’s Ahead for CMBS in 2025?

As the new year begins, the U.S. CMBS market is facing a number of persistent challenges as well as emerging opportunities. While 2024’s strong issuance momentum will carry forth into the new year, asset performance challenges on existing exposures, coupled with potential disruptors– including deteriorating macroeconomic conditions, rising geopolitical risks and accelerating climate risk–could affect the sector’s outlook.

Lower interest rates will improve refinancing prospects for 10-year fixed-rate loans in the U.S. CRE market, where conduit CMBS and life insurance companies are active. However, borrowers transitioning from historically low interest rates still remain vulnerable to the higher rates, which are now the norm. Maturity defaults, particularly for older Class B/C office properties and regional malls, will persist as refinancing at higher rates becomes unavoidable. This will likely lead to increased loan delinquencies as well as more loans transferring to special servicing. Fitch Ratings projects overall delinquencies to rise to 3.5 percent in 2025 and 4.2 percent in 2026, up from 2.8 percent in November 2024.

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Falling interest rates cannot reverse the post-pandemic decline in CRE values, but they will provide some relief to borrowers with floating-rate loans. Within the single-borrower CMBS market, lower rates will provide more restructuring options for maturing floating-rate loans and help to offset rising insurance premiums, leasing costs and other operating expenses.

The U.S. CRE CLO market is poised to benefit quickly from falling interest rates. These transactions, almost exclusively, pool together floating-rate loans originated within the last five years. Loans originated before 2023 continue to benefit from interest rate caps with strike prices well below today’s SOFR rate, but face payment shock on hedge expiry. Conversely, loans originated in 2023 and 2024, hedged at strike rates too high to take effect, enjoy immediate relief as rates decline and for a subset of more seasoned loans that have had to purchase new caps to exercise loan extensions.

Refinancing opportunities for CRE CLOs should also improve, as indicated by the recent decrease in new lending interest rates. The weighted average loan coupon of 7.75 percent in recent Fitch-rated deals is approximately 90 basis points below the YE 2023 average of 8.62 percent. Lower rates will help CRE CLO borrowers resume delayed capital-intensive business plans, accelerating project completion and income stabilization.

Fitch Ratings’ recently published Global Economic Outlook for 2025 highlights rising U.S. inflation risks due to robust consumer spending growth, impending tariff hikes and a slowdown in net immigration affecting labor supply. Despite these challenges, U.S. consumer spending shows no signs of slowing, with faster household income growth and stronger savings buffers. Fitch has raised U.S. inflation forecasts but still expects the Federal Reserve to gradually lower interest rates towards neutral, with a total of 125 basis points in cuts anticipated by the end of 2025. However, no further Fed rate cuts are expected in 2026.

Performance markers

U.S. CMBS asset performance will diverge between older, less desirable assets requiring significant capital investment and newer and more flexible green properties situated in prime locations. Tighter lending conditions and demand-side pressures, along with rising insurance, labor and climate-related costs, will hinder performance and slow revenue growth.

Office assets are likely to experience further performance deterioration, with increased delinquencies expected in 2025, and peaking in 2026. Office vacancies will rise as tenants adapt to hybrid working models, while newly constructed, flexible, green offices in prime locations will remain desirable.

The retail sector is benefiting from a lack of new developments, a shortage of prime retail spaces and sustained post-pandemic demand, which have supported positive net absorption, rising rents and low vacancy rates. Anchored retail centers and trophy regional malls are well-positioned, while non-trophy malls face reduced demand.

The multifamily sector faces headwinds from a large influx of new supply, expected to increase vacancy rates and slow rental growth, particularly for class A properties. Conversely, single-family rentals are expected to outperform traditional multifamily units, supported by steady occupancy rates and favorable demographics.

The hotel sector is projected to see a slowdown in growth as the post-pandemic surge in leisure travel demand normalizes, slowing revenue per available room growth. Business travel and group demand, however, show resilience.

The industrial sector is nearing the end of a significant development phase. Vacancy rates are expected to peak in mid-2025 as new supply is absorbed. Rent growth will decelerate as space availability increases. However, as new construction slows, vacancies may begin to tighten in late 2025.

Outside of asset performance, rising policy and geopolitical risks, such as increased U.S. trade protectionism or significant geopolitical tensions, could disrupt global supply chains and financial markets. Deteriorating macroeconomic conditions, including persistent inflation and rising interest rates, could increase financial burdens, leading to higher delinquencies and defaults. Accelerating climate risks could also affect property values and increase expenses for borrowers.

Melissa Che is a senior director at Fitch Ratings overseeing surveillance and leading research for the North America Structured Finance CMBS group.