Underwater Loans Put CRE on Shaky Ground in 2025
With $500 billion in CRE loans maturing this year, a significant portion is underwater—posing serious challenges for investors and lenders alike.
Jordan B.
January 27, 2025
In partnership with
Good morning. With $500 billion in CRE loans set to mature this year, a large share is underwater, creating substantial hurdles for investors and lenders. Meanwhile, CBRE's Q4 2024 multifamily survey highlights stable underwriting assumptions and a modest uptick in core asset IRR targets.
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Market Snapshot
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*Data as of 01/24/2024 market close.
CRE LANDSCAPE
Underwater Loans and Distressed Assets Continue to Shape CRE in 2025
According to MSCI's latest analysis, the commercial real estate market will face ongoing challenges in 2025 as underwater loans and distressed assets remain prominent concerns.
Loans at risk: Of the $500 billion in CRE loans maturing this year, 14% are considered underwater, meaning the outstanding debt exceeds the asset's current value. Multifamily housing and office properties are particularly at risk.
By the numbers: Multifamily loans worth nearly $19 billion, or 10% of those maturing in 2025, are now underwater, largely due to acquisitions made at record-high prices during 2020–2022. Similarly, the office sector is struggling, with 30% of maturing office loans—totaling $30 billion—now exceeding property values.
Asset-specific challenges: Structural issues are pressuring certain sectors, according to MSCI’s Alexis Maltin.
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Industrial: Older properties, especially those built pre-2010, face challenges with obsolescence and functionality.
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Retail: Larger malls continue to struggle, with 80% of underwater retail loans tied to these underperforming assets.
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Multifamily: While structurally sound, some Multifamily assets have left investors vulnerable due to inflated valuations during the recent real estate boom.
Glimmers of opportunity: Amid the turbulence, demand for certain office properties is improving. Sales activity in central business district (CBD) offices increased in Q4 2024, with price adjustments drawing investors. MSCI also reported that overall distress levels across the CRE market declined in the last quarter, though delinquent and foreclosed loans remain a separate challenge from underwater debt.
➥ THE TAKEAWAY
The bigger picture: While the pace of distress has slowed, the prevalence of underwater loans signals an uphill climb for the CRE sector in 2025. Investors are finding value in discounted properties with strong tenant profiles, but refinancing hurdles, especially for office and retail properties, will continue to test the market's resilience.
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✍️ Editor’s Picks
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Growing gap: The US construction industry will need 439K net new workers this year to meet demand, with shortages potentially worse than predicted.
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Yield watch: The 10-year Treasury yield could see volatility in 2025, influenced by inflation, employment trends, and economic policies, with potential CRE impacts like higher cap rates and negative leverage concerns.
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Earnings report: HCA Healthcare reported $18.3B in Q4 revenue, outperforming expectations despite hurricane disruptions, with strong fundamentals and ongoing expansion.
🏘️ MULTIFAMILY
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Underwriting stabilizes: CBRE's Q4 2024 multifamily survey shows stable underwriting assumptions, with a slight rise in core asset IRR targets and improving sentiment, as the market anticipates clarity on federal policies.
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Office-to-Resi: Jamison Properties plans to convert a 32-story office tower in downtown L.A. into 686 apartments, leveraging minimal structural retrofitting to cut costs and time amidst high office vacancies.
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River Parc expansion: Related Group plans to add 1,038 apartments to Miami’s River Parc complex under Florida's Live Local Act, with two 21-story towers and 40% of units reserved for affordable housing.
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MHC portfolio: Marcus & Millichap brokered the sale of a 12-property, 544-unit manufactured housing portfolio across Georgia and Florida, highlighting strong demand for affordable housing in the Sun Belt.
🏭 Industrial
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Rent growth: As industrial rents continue to rise across the country, the Midwest is seeing only minimal growth, while Miami leads the nation.
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IOS demand: Truck terminals and industrial outdoor storage (IOS) are gaining traction as institutional investors recognize their supply constraints, irreplaceable nature, and strong cash-flow potential.
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More data: Blackstone (BX) will acquire the Potomac Energy Center, a 774-megawatt natural gas-fired power plant located in Loudoun County, VA.
🏬 RETAIL
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Lease growth: Net lease cap rates rose across retail and industrial sectors in January, fueled by a 33% surge in new listings, with casual dining, banking, and convenience stores leading supply growth.
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Resurgence: Despite e-commerce growth, 80% of U.S. retail sales still occur in stores, with major brands like Lululemon, Sephora, and Foot Locker expanding physical footprints, reflecting a shift toward "harmonized retail".
🏢 OFFICE
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DFW rebound: Dallas-Fort Worth's office market saw 189K SF of positive absorption in Q4 2024, its first gain in two years, with strong demand for Class-A spaces, especially in Uptown.
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Sale-leaseback: AT&T sold 74 properties totaling 13M SF to Reign Capital for $850M in a sale-leaseback deal, cutting costs and optimizing its footprint as it transitions to modern fiber-optic networks.
🏨 HOSPITALITY
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Hotel construction: By the end of Q4, the US hotel construction pipeline included a record 6.38K projects and nearly 747K rooms, with 8% room growth compared to 2023.
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📈 CHART OF THE DAY
According to RealPage, the U.S. apartment market reached a 50-year high in 2024, with seven straight quarters of record-breaking supply and over 160,400 units completed in Q3 alone, driven by robust construction in the South and West.
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