Interest Rate Clarity, Narrower Bid-Ask Spreads Mean Busier Year for CRE Financing

The commercial real estate capital markets entered 2025 with sizable unknowns — not the least of which were long-term interest rates and regulatory pressure. Still, volume should take off even when compared to a busier 2024.

Last year dawned with hopes of six or seven interest rate cuts that would bring down soaring borrowing costs, but CRE folks had to wait until September before the Federal Reserve took action with a 50 basis point reduction. Two more quarter-point cuts followed, with the central bank’s committee members indicating after its Dec. 18 meeting that short-term rates will stay largely the same in 2025 with only two cuts projected for this year.

Regardless of the long wait for cuts, total CRE borrowing for 2024 was on pace to finish 26 percent ahead of 2023’s originations at $539 billion, according to a baseline forecast released in late August by the Mortgage Bankers Association (MBA). The spike in lending activity occurred after the year began with a sluggish start. First-quarter CRE loans were down 23 percent from the fourth quarter of 2023, according to MBA data.

The start of 2025 is expected to look vastly different from a year ago with many term sheets already in for first-quarter deals, according to Laura Swihart, co-chair of law firm Dechert’s global finance and real estate practice groups.

“For 2025 I think people are fairly optimistic, and we are already seeing a lot of first-quarter deals coming in at the end of the year,” Swihart said in December. “I don’t think it is going to slow much at all.” 

Much of the late 2024 surge in CRE lending volume was driven by the commercial mortgage-backed securities (CMBS) market, which had issuance on track to surpass $100 billion for the year compared with $42 billion in 2023, according to a Moody’s outlook released in December. The big year-over-year jump — which brought CMBS issuance to its highest level since 2021, before interest rates began to rise — was led by $67 billion from the
single-asset, single-borrower (SASB) market, according to Moody’s.

CMBS volume is positioned to supercharge in 2025, perhaps up to around $150 billion. That’s if interest rates stay relatively stable, given investor demand for the product, and also if acquisition financings begin to take hold in addition to refinancings, according to Lisa Pendergast, executive director of the Commercial Real Estate Finance Council.

“Even though the supply of the market has increased, spreads continue to tighten, which means there are more bond buyers than we’ve had in the past,” Pendergast said. “I’m proud of the industry because we’ve seen some pretty conservative underwriting.” 

Part of what has recently driven momentum for CMBS issuance is banks’ reluctance to add more CRE loans to their balance sheets in the face of higher interest rates and greater regulatory scrutiny. 

Banks entered the new year amid the Federal Reserve’s looming Basel III proposal for more regulation and supervision of banks, including a requirement that institutions hold 9 percent more in capital in aggregate. However, with Donald Trump set to begin his second stint in the Oval Office on Jan. 20, the future of Basel III is now up in the air. 

Removing Basel III from the equation would play a huge role in giving banks more comfort to lend more on their balance sheets, according to Pendergast. 

“If that issue is not this cloud hanging over the industry I think you’ll see a better mix of different types of lenders involved in the market, including the banks,” she said. “Until there is clarity on some of these regulatory issues like Basel, I think that those who have the opportunity to do a securitization are going to go that route, and that’s why you’ve seen this wonderful blossoming of the CMBS market once again.” 

The U.S. now has nearly $6 trillion in CRE mortgage debt outstanding, according to a Moody’s citation of Federal Reserve data. Most CRE loans are held by banks (50.8 percent) followed by government-sponsored enterprises (17.2 percent), insurance companies (12.8 percent), CMBS (8.5 percent), and private lenders or mortgage real estate investment trusts (3.3 percent). 

While the CRE industry is hoping for a revival of bank balance-sheet lending in 2025, private lenders are expected to continue filling the void in the higher interest rate environment. Alternative lenders along with insurance companies will play an especially crucial role during a year in which CRE loan maturities are expected to near the $1 trillion mark, according to S&P Global Ratings. Many of these borrowers will need refinancings amid far higher borrowing costs than when their initial loans were issued prior to 2022.

Ran Eliasaf, founder and managing partner of Northwind Group, is one of the private lenders that seized opportunities as many banks pulled back. The lender originated $1.1 billion in 2024 — a record year for Northwind and more than 30 percent higher than its 2023 numbers. The firm is already on track for a big 2025, with $500 million lined up for January and Eliasaf projecting a 50 percent year-over-year jump in originations.

Eliasaf said 2025 is poised to be another big year for the private credit arena in general, with the bid-ask spread already narrowing.

“We’re seeing sellers realizing the value is not changing dramatically and kind of cutting their losses and selling, and we’re seeing a floor of pricing even in the beaten-up Class B office and a lot more trades in that segment,” Eliasaf said. “I think in 2025 the overall sale and velocity activity is probably going to be 50 percent more than 2024.” 

The uptick in transaction activity will span the property sectors, according to Jay Neveloff, chair of law firm Kramer Levin’s real estate practice. And, yes, that includes office. 

Neveloff said a number of property owners are exploring office deals in New York, seeking good bargains on either Class B or non-trophy Class A. They see potential for leasing momentum as an increasing number of companies in the Big Apple phase out remote-work policies. A big challenge persists in financing older office properties: devising ways to enable tenants to upgrade their space. 

“If you find a tenant, you still have to give them a tenant allowance to fix up space, you need to pay the broker, and I think that landlords are going to start to get more creative with how they pay that out,” Neveloff said. “For example, credit tenants are able to do something where they can separately finance a lot of their tenant improvement given priorities that will rely on the credit of the tenant, and that tool will make it easier for landlords to rent their space.” 

With more clarity on the Fed’s interest rate direction entering 2025, property owners who have been reluctant to seal deals may be ready to start acquiring assets.

Borrowing costs remain high, however, which is resulting in a number of sponsors making more prudent decisions regarding which projects they should seek to finance, according to Ryan Reich, chief financial officer of developer and owner Mountain Shore Properties.

“If the deal doesn’t pencil at the current market rates, we’re not going to typically do the deal,” Reich said. “We’re not going to pencil in 8 or 9 percent capital to develop the deal and then a magical 5.5 or 6 percent refinancing rate in year five to make things look good.”

Reich said the deals he has found “easiest to pencil” of late are hospitality assets with big brands behind them, such as Hotel Genevieve in Louisville, which was the city’s first Bunkhouse-branded hotel. Mountain Shore’s extensive lodging portfolio, which includes other Bunkhouse properties, received an added boost in August when Hyatt acquired Bunkhouse as part of a $335 million deal with Standard International’s major hotel brands.

“It’s certainly much easier to finance a flag hotel than it is a boutique hotel,” Reich said. “The reality is these flagged hotels that are backed by the brand perform better and they are safer than an unproven boutique.”

Matthew Adell, president of New York City developer Adellco, said there is general optimism among CRE owners of 2025 being an active year for deals despite expectations that the pace of interest rate cuts will slow. He said there is also confidence in receiving necessary financing for acquisitions, construction or conversions by late 2025 if looser regulations on banks under the Trump administration take hold. 

Adell said that while lenders will remain reluctant early this year to provide senior debt on traditional office properties, there is enough appetite to lend on office-to-resi conversions in New York. Adellco is in the late stages of converting its 12-story office building at 114 East 25th Street into a residential tower slated to debut in early 2025.

“I don’t think lenders are lending on office to stay as office unless it’s brand new or you have an anchor tenant in place,” Adell said. “In terms of lenders being open to financing acquisitions for conversion to other uses, that is definitely available.”

As interest rates remain high in 2025, finding supplemental financing sources to accompany senior loans will continue to be a big theme, according to Stephen Preuss, vice president of investment sales at Ripco Real Estate. Preuss noted that there have been many examples of late with property owners hedging or expanding their portfolio by investing in preferred equity or mezzanine debt.

“People are trying to work through some of their issue points to be able to go ahead and start playing offense again and taking advantage of some of the better valuations and deals as we continue to reset values,” Preuss said. “Those secondary tranches of either equity or debt are highly needed in today’s world, and it’s going to be something that is going to be executed at a high level volume-wise going into 2025.”

Andrew Coen can be reached at acoen@commercialobserver.com.