By Joe Derhake, PE, CEO of Partner Engineering and Science, Inc. (CP Realty Advisors client)
The Mortgage Bankers Association’s recent revision of its 2025 commercial/multifamily mortgage lending forecast down to 16% from its August 2024 projection of 24% reflects a broader perspective on the shifting CRE landscape: still growing, but not as robustly as we hoped. Market analysts point to a mix of positive and negative factors influencing this shift, including:
- Strong lender demand across all debt categories.
- Uncertainty in the 10-year Treasury yield, broader economic trends, and U.S. policy decisions.
- Persistently high interest rates, leading many borrowers to delay financing decisions.
- A substantial volume of loan maturities in 2025, with nearly $1 trillion in commercial real estate mortgages coming due.
- A shift in lender strategy, moving away from automatic extensions, which may result in increased asset sales, refinancing, loan restructurings, or foreclosures.
Despite these uncertainties, several notable trends are emerging that will be important to watch in the coming year.
1. Develop a Plan for Distressed Assets
Loan delinquency rates are rising across most property types, with industrial real estate being the only exception. Special servicers are reporting an influx of distressed assets beyond just office properties.
- Lender Tip: Keep a close eye on property conditions, as early signs of physical deterioration can indicate financial distress. Engaging valuation and due diligence experts can help assess potential risks if a loan requires restructuring. If you need to brush up on the loan workout process and approach to evaluating the property, check out this helpful webinar.
- Borrower Tip: If facing financial strain, communicate with lenders early and work collaboratively. Presenting a well-thought-out business plan can help facilitate solutions.
2. Bridge Lending Continues to Play a Vital Role
Bridge loans remain an essential financing option due to ongoing market conditions, including high interest rates, hurdles in new construction, and the need to reposition or redevelop distressed properties.
- Tip: Bridge lenders should carefully evaluate risks by conducting feasibility reviews before loan origination and maintaining oversight through post-close monitoring. Since many bridge loans involve significant construction components, lenders should implement proper risk management strategies similar to those used in construction financing. Our colleague Charlie Tallinger wrote about this subject on GlobeSt.com, here.
3. Address Construction Challenges with Feasibility Assessments
The construction sector continues to face obstacles, such as labor shortages, fluctuating material costs, and supply chain disruptions linked to trade tariffs. Wage regulations, including Davis-Bacon requirements, are also increasing labor expenses, while stricter immigration policies have led to subcontractor shortages.
- Tip: Conduct thorough feasibility assessments before starting a project to ensure the project budget and schedule are realistic. To mitigate risk and avoid project delays, be sure to evaluate contractors for financial stability and capability to execute.
4. Manage Rising Insurance Costs Through Property Resilience Analysis
Growing concerns over natural disasters have contributed to rising insurance premiums, particularly in high-risk areas, potentially affecting property values.
- Tip: Property owners can obtain detailed resilience evaluations to provide insurers with a clearer picture of a building’s specific climate-related risks and mitigation strategies. This approach has successfully helped reduce insurance costs in some cases.
5. C-PACE Financing Gains Traction
Commercial Property Assessed Clean Energy (C-PACE) financing is expanding as a tool for funding energy-efficient upgrades and sustainable construction. Since it is regulated at the state and local levels, it is unlikely to be significantly impacted by federal policy changes.
- Tip: Working with an experienced sustainability consultant can help ensure compliance with state and local regulations as well as C-PACE requirements, which mandate improvements in energy or water efficiency for qualifying projects.
Looking Ahead…
Industry experts emphasize the need for creative deal structuring and proactive planning to navigate the challenges and opportunities ahead. Market participants should be ready to move quickly when rates drop. With a surge comes the need for due diligence at the speed and scale that the CRE finance industry demands – Partner stands ready to support a resurgence of transactions in 2025.
