2025: CRE Credit Trends Set to Worsen

January 2, 2024
1 min read

According to Fitch Ratings, credit trends in commercial real estate are expected to deteriorate through 2024 and into 2025. The decline will be seen across various sectors including office, retail, hotel, multifamily, and industrial properties. The agency predicts that office properties will be hit the hardest, with growing macroeconomic headwinds and high interest rates leading to increased maturity defaults. Fitch forecasts that overall U.S. CMBS loan delinquencies will double from 2.25% in November 2023 to 4.5% in 2024 and 4.9% in 2025.

The weakened credit trends are a result of various factors, including a slowdown in economic growth, rising interest rates, and changing consumer behavior. Office properties are particularly vulnerable due to an oversupply of space and changing work dynamics, with more companies embracing remote work and flexible office arrangements. This has led to higher vacancies and lower rental rates.

Retail properties are also facing challenges, as e-commerce continues to impact brick-and-mortar stores. The rise of online shopping has led to store closures and declining foot traffic in malls. Hotel properties are experiencing a similar decline, with the rise of home-sharing platforms like Airbnb and increased competition from budget hotel chains.

Multifamily properties are seeing a slowdown in rental growth, with an oversupply of luxury apartments and increasing rental costs. The industrial sector is also facing headwinds, as the growth of e-commerce has changed warehouse and distribution needs. Demand for large warehouses has increased, while smaller industrial properties are seeing a decline.

Overall, the credit deterioration in commercial real estate is expected to continue over the next few years. It is important for investors and lenders to carefully assess the risks associated with different property types and consider the potential impact of changing market conditions. Adaptation and innovation will be key for property owners and developers to navigate these challenging trends.

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