- Banks are preparing for a CRE lending rebound as interest rates gradually fall, which could drive new loan originations in 2025.
- Banks hold over 50% of U.S. CRE mortgage debt, far surpassing other lenders, and their return to form could have a huge impact on the market.
- Fed projections suggest a potential drop to 3.4% by the end of 2025, leading to renewed optimism for CRE financing.
According to Commercial Observer, with interest rates finally slowing down, banks are preparing to ramp up CRE lending by 2025.
Zooming Out
After more than two years of relative inactivity following the Fed’s hawkish rate hikes, the prospect of upcoming rate cuts means many banks are reassessing their CRE lending outlook, particularly for multifamily properties and high-quality assets.
Since early 2022, rising interest rates led banks to scale back on balance sheet lending in CRE, affecting a nearly $6T mortgage debt market. According to Moody’s, banks hold over half of this debt, even after government-sponsored entities and nonbank lenders stepped in to fill the void.
However, with the Federal Reserve signaling more rate cuts next year, big banks like JPMorgan Chase (JPM) are cautiously optimistic about upping their CRE lending volumes next year.
Filling The Void
During the high-rate environment, alternative lenders like private equity firms and CMBS markets did their best to fill the void and corner CRE lending. CMBS issuance reached $42.29B in 1H24, nearly tripling last year’s volumes.
Nonetheless, banks are showing interest in handling large loans for premium properties through CMBS, allowing them to participate without holding the risk on their balance sheets.
Current Conditions
For now, major banks continue to enforce strict underwriting standards for new CRE loans. Moody’s reports that loan-to-value ratios for large loans are still between 50% to 60%, with debt yields in the high single digits.
These conservative standards reflect an effort to mitigate risk, especially as certain commercial property sectors, such as offices, face lingering refinancing challenges. As seasoned loans with older, lower interest rates are renewed, many banks are requesting higher equity contributions or improved covenants from borrowers.
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Regional Runup
Regional banks are cautiously assessing the potential to ramp up their CRE lending in 2025. While regional banks face limitations compared to larger institutions, well-capitalized players see plenty of opportunity as asset valuations begin to stabilize.
For instance, EagleBank estimates substantial projects are likely to seek permanent financing, presenting a strategic opening if rates continue to ease.
Rate Expectations
The Fed’s interest rate policy changes are creating a new lending landscape. Large banks are showing renewed interest in selective balance sheet loans, especially for stabilized assets in multifamily or high-quality office sectors.
If economic conditions remain stable, the Fed’s benchmark rate, currently at 4.75% to 5%, is projected to fall to around 3.4% by late 2025.
