As we turn the page on 2024, I have been reflecting on prior articles that discussed when and where we believed commercial real estate (CRE) distress would emerge at scale. The good news is that 2025 may finally bring a gift to opportunistic buyers. In June 2023, based on the precedent of the Global Financial Crisis in 2008-09, I predicted that outside the office sector and a few isolated multifamily transactions, distressed buying opportunities wouldn’t emerge for several quarters. More recently, one of our top 10 2025 multifamily predictions called for an acceleration of realized losses by lenders.
Heading into 2025, the CRE market faces a critical shift: the end of “extend and pretend” and the rising likelihood of lender-driven sales. This finally could create significant distressed buying opportunities for investors seeking office assets or older-vintage and value-add multifamily. That said, we still see limited buying opportunities emerging for distressed institutional-quality, Class A multifamily assets.
The End of Loan Maturity Extensions
During the height of the pandemic and afterward, lenders frequently extended loan maturities to help borrowers weather economic uncertainty. This leniency, however, came at a cost. Many lenders now are grappling with weakened balance sheets, particularly as interest rates have risen and the value of certain asset classes—notably office, hospitality and retail—has declined.
According to the New York Federal Reserve, banks’ use of extend and pretend led to credit misallocation and “financial fragility.” But so far, researchers say, “nonperforming loans and net charge-offs have remained low by historical standards, especially for weakly capitalized banks.” However, commercial banks’ behavior—which represent over half of the aggregate $5.8 trillion CRE debt market—has created a maturity wall representing 27% of bank capital. The bulk of these maturities will begin accelerating dramatically over the next three years.
A growing number of major banks and private lenders are taking significant write-downs on their CRE loan portfolios. Notably, that is being driven by their exposure to troubled office loans. This trend is visible in the dramatic rise in charge-off rates on loans secured by real estate, as reported by the St. Louis Fed. The ability for banks to take orderly and elongated marks against their troubled loan portfolios suggests that they will take harder lines with borrowers with distressed loans upon maturity. Lenders likely will push borrowers to pay off existing loans. That will require either refinancing with new debt capital (which may require an additional infusion of equity capital) or selling the asset.
What Types of Distressed Transactions Will Emerge?
U.S. commercial banks represent 51% of the CRE debt universe—by far the largest slice. The CMBS, or securitized loan, market represents a much smaller slice at 13%, slightly smaller than life insurance companies. However, the credit comprising CMBS loan pools is substantially more impaired. Its current delinquency rate is 6.40% compared with banks and thrifts at 1.24% to 1.52%.
Peeling back the CMBS onion, we can see an accelerating trend in delinquencies in office, multifamily and lodging (hospitality). Office and lodging delinquency rates are 10.4% and 6.9%, respectively, and retail lags at 6.6%. CMBS loans are experiencing significantly more delinquent payments from levels just six months ago.
Delinquency Rate by Property Type
Source: Trepp
Piecing this all together, we expect distressed buying opportunities to accelerate in 2025 through increased sales volumes of distressed office, hospitality, retail—and, yes, some multifamily assets. Where is the low-hanging fruit? Most likely, commodity suburban office assets, exurban limited-service hotels and Class B-D multifamily assets that transacted during the peak 2020-21 period. The CMBS market’s current delinquency rates, combined with the fact that unlike some bank loans, these loans do not require a personal guarantee, mean we expect distressed CMBS-originated opportunities to hit the market in early to mid-2025. Commercial bank and debt fund-originated opportunities following shortly thereafter. Specific to multifamily, between now and 2026, $218 billion in loans originated in the pandemic liquidity bubble of 2020-21 will mature. These loans, issued at peak valuations, have a higher likelihood of distress.
Where Distress May Emerge
It’s hard to handicap the impairment that these lenders will face and the write-downs that may have already been taken. But it is likely that the bulk of the distressed opportunities will emerge in markets where most Class B-D trades occurred during peak valuation periods—markets like Atlanta, Dallas, Houston, Miami, Phoenix and Washington, D.C. These markets experienced an outsized share of the national transaction volume during this time. But distressed buying opportunities will likely emerge in nearly every market around the country.
However, we do not believe we’ll see significant distressed buying opportunities emerge for institutional-quality, Class A multifamily assets in 2025. That’s for two reasons. First, on a relative basis, the valuation run-up for this market segment was substantially less than that of the Class B-D segment. Second, many institutional and Class A buyers, relative to the B-D segment, utilized lower leverage and paired these acquisitions with low fixed-rate, long-term financing.
For those patiently waiting for an opportunistic buying environment to emerge, depending on your investment criteria, Santa (lenders) may be bringing you a gift in 2025.
