As we enter the final quarter of 2024, the commercial mortgage-backed securities (CMBS) market is experiencing both volatility and emerging opportunities. Recent economic changes, most notably the Federal Reserve’s first interest rate cut in four years, are poised to shape the CMBS landscape well into 2025. While challenges remain, such as high delinquency rates and refinancing difficulties, this rate cut may provide much-needed relief for investors and property owners alike.
In September 2024, the Federal Reserve’s anticipated rate cut marked a significant shift in monetary policy, following years of elevated rates. The previous environment had increased borrowing costs, making refinancing a challenge for many commercial property owners. This recent cut is expected to reduce debt servicing costs, improve cash flows, and ease pressure on loan-to-value ratios. For borrowers with loans maturing in 2024 and 2025, this change comes at a critical time. More than $115 billion in CMBS loans are due for refinancing this year alone, and lower borrowing costs will make it easier for property owners to extend or refinance their loans. This is especially crucial for the office sector, where delinquency rates are projected to reach nearly 10% by 2025 due to ongoing remote work trends.
Despite the rate cut, volatility persists. As of mid-2024, CMBS delinquency rates had risen to 5.1%, with the office sector facing the highest levels of distress. The retail sector, still grappling with post-pandemic shifts, also continues to experience challenges, although prime retail locations are showing some resilience.
A major contributor to the current market instability is the large volume of maturing loans. Many of these were issued when interest rates were near historic lows, and the recent spike in borrowing costs made refinancing much more expensive. However, with the Fed’s latest action, refinancing prospects are expected to improve, particularly for high-quality properties and well-capitalized borrowers.
Amid these challenges, there are still significant opportunities for investors. Single-asset single-borrower (SASB) deals remain a strong performer in the CMBS landscape. These transactions, typically involving large, institutional-quality assets, have continued to attract investor demand throughout 2024. With lower interest rates now in play, investor interest in these high-quality assets is likely to grow further.
Moreover, distressed asset purchases may offer compelling opportunities for investors willing to take on more risk. Rising delinquency rates, especially in the office and retail sectors, could lead to the availability of properties at discounted prices. The Fed’s rate cut may stabilize valuations in the coming months, reducing the likelihood of severe price drops and creating a favorable environment for opportunistic acquisitions.
Looking ahead to 2025, the outlook remains cautious but hopeful. Should the Federal Reserve continue to lower rates, the CMBS market could experience broader recovery, with improved refinancing conditions and reduced delinquency rates.
