Waiting For CRE Debt to Get Cheaper in 2025? Good Luck

CRE owners looking for a break from high borrowing costs in 2025 may find little reprieve. Bond yields have climbed since the Federal Reserve began easing monetary policy in September 2024, and hopes of a rapid reduction in long-term rates are fading.

Bond analysts caution that without significant economic turmoil—such as a recession—expectations for falling debt costs are unrealistic, per Bisnow.

The Yield Surge

The benchmark 10-year Treasury yield has risen sharply by around 100 bps, revealing broader market anxiety about inflation and the Fed’s tightening policies.

Zach Griffiths, head of investment grade and macro strategy at CreditSights, cautions it’s difficult to imagine a scenario in which yields would fall significantly without triggering a major economic downturn.

This growing yield environment has been spurred by inflation concerns and shifting investor expectations regarding the Federal Reserve’s policy moves. As the Fed signals it may take a more conservative approach to interest rate cuts in 2025, the market has adjusted, with many investors expecting borrowing costs to stay high.

The Fed’s Policy Shift

The Fed’s actions have been pivotal in shaping expectations for 2025. In December 2024, the Fed revised its inflation projections and signaled the pace of rate cuts would slow. 

With inflation staying stubbornly above its 2% target and a tight labor market, the central bank will likely hold rates steady for much of the year. The Fed’s cautious approach, including only a few 25 bps cuts in 2025, means CRE owners will face a similar interest rate environment as in 2024.

Still Extending And Pretending

Many CRE owners have resorted to extending loan maturities or postponing refinancing, hoping for better lending conditions. 

However, with rates unlikely to drop significantly, this strategy is coming under increasing pressure.  And for higher-leverage projects, especially those facing debt maturities in 2025, the clock is ticking.

J.C. de Ona, Southeast Florida division president at Centennial Bank, notes that this rate environment poses a serious problem for some developers, especially those relying on debt service relief to stay afloat. Some owners have chosen to lock in current rates, while others remain apprehensive.

Macro Risks, Political Uncertainty

Looking further ahead, analysts are considering the broader economic environment, with political developments—such as the start of Donald Trump’s presidency—looming large. 

If the new administration enacts inflationary policies such as tax cuts or tariffs, these could exacerbate inflationary pressures, potentially further discouraging a drop in yields.

Jack Herr, an investment analyst at GuideStone, highlights that policies such as tax cuts and tariffs could stimulate growth but may also intensify inflation. This uncertainty about US economic policy is adding to market volatility, making it unlikely bond yields will fall substantially in 2025.

A Return to Normal?

Rather than expecting the return of the ultralow interest rates that defined the years following the 2008 financial crisis and the pandemic, analysts argue that the US is entering a “new reality.” The emergency measures that kept borrowing costs low during those crises are now a thing of the past, and with inflation remaining persistent, borrowing costs are likely to stabilize at a higher level.

“I wouldn’t expect the 10-year to have any big move down to where we were before COVID or even at the beginning stages of COVID,” says Herr. “We’re living in a new reality.”

What’s Next?

As more CRE loans come due in 2025, owners will face a refinancing environment that is unlikely to offer significant relief. With approximately $1.5T in CRE loans maturing this year, many developers must brace for continued high borrowing costs. 

Instead of waiting for a significant rate downturn, CRE owners are likely to need to adapt to the increasingly clear “higher-for-longer” rate environment.