TreppWire’s Stephen Buschbom shares his CRE outlook and key metrics he’s watching for 2025

Unknowns and opportunity for 2025

The TreppWire Podcast’s co-host, Dr. Stephen Buschbom, joined a recent edition of the Altus Group’s CRE Exchange podcast to discuss key signals he’s been watching in the CRE market over the past year and what he sees ahead for 2025.

When Buschbom was on the podcast a year ago, he provided insights into debt market trends and the broad macroeconomic environment, as well as offering expectations for 2024. That analysis included some sharp calls on how geopolitics would reverberate across the market, CRE liquidity would be constrained but getting better, and spot-on calls related to insurance becoming a bigger factor and rising delinquency rates in the securitized space. So, what big themes does Buschbom see ahead for 2025?

“The name of the game for this year is unknowns,” says Buschbom. A number of factors in play could shift the economy and CRE market conditions. One could easily paint a picture where executive mandates and tax reforms could pave the way for very strong economic growth and continued tightening spreads. Conversely, there is another scenario where tariffs could reignite inflation concerns, triggering a bond sell-off, wider spreads and weaker growth.

Outcomes could span a wide spectrum this year from a scenario analysis, which makes it really interesting for investors. “Anytime you have this large of a divergence in opinion, this is when opportunity is ripe for the picking,” says Buschbom. “So, perhaps that's the term we can lean into this year for 2025 is opportunity.”

Debt maturities remain at the forefront

One of the headline topics last year was maturity defaults and the looming maturity wall, and there are continued difficulties ahead for loan maturities in 2025, 2026 and 2027. “What’s going to be more important to watch going forward will be how some of these modified loans perform,” notes Buschbom.

When you take a bifurcated view of the market looking at maturity defaults versus term defaults, maturity defaults represent about three-fourths of loans that are 60-plus days delinquent, including non-performing matured balloons. “What I want to see going forward is these loans that have been modified for anywhere from a one- to four-year extension. Do we start seeing those refinance and pay off?” says Buschbom.

As an example, there was a SASB loan that hit its maturity date in October with two years of extension options left. The borrower was very intent on refinancing the loan and not exercising the extension option. “That is very interesting and part and parcel to that discussion of – how conducive or how attractive is the current environment to term out your debt?” says Buschbom. If “higher for longer” is going to remain the narrative over the next couple of years, then there’s not a big benefit in being able to squeeze out an extra 20 or 30 basis points in the 10-year rate. “I’ll be paying very close attention to the modified refinance trends in 2025 as a sign of, hopefully, thawing credit markets, and also how confident borrowers are beginning to feel about the future,” he says.

Looking back at 2024 road signs

Looking back at 2024, the yield on the 10-year treasury rose 60 basis points, credit spreads ground to historic tights, the broader stock market returned about 25% while REITs delivered about 5%. Corporate bond issuance was up and high-yield bond issuance in particular was up about 65%. CMBS issues also increased, driven mainly by large loan single asset single borrower (SASB) issuance.

Pricing was favorable to CMBS issuance in 2024, exceeding$100 billion. “That was awesome to see, but we’re still net negative on the space,” says Buschbom. In other words, more loans are rolling off compared to new loans getting issued and securitized.

In addition, SASB deals represented the lion’s share of issuance at almost $71 billion. That volume is significant compared to about $20 billion in 2023, while still below the previous highwater mark of $81 billion in 2021, according to Trepp. “Because of the flexibility you have in deal structuring, and importantly, the fact that you can get floating rate debt that gives you prepayment flexibility, that's been a very efficient product type for structuring,” notes Buschbom.

Another sign that the CRE market regained some footing and confidence is improvement in some of the MSAs that had been considered laggards over the past couple of years. Washington, D.C. and San Francisco in particular are two cities that saw highly publicized struggles that appeared to have turned the corner with positive momentum over the past 12 to 16 months.

“For Washington, D.C. I don’t know that we’re there yet. So, maybe 2025 is the year where we start getting some clarity, which I don’t think will come as any surprise that with the change in the administration there will be a lot of interest this year,” says Buschbom.

“I agree that D.C. will be very interesting because of a number of competing forces,” adds Omar Eltorai, Altus Group’s US Director of Research. There are some real teeth to some of the return-to-office policies. At the same time, the federal government has a strong presence in the D.C. office market, both directly and indirectly through companies that are tied to government, such as contractors, lobbyists and attorneys. If the government starts cutting federal jobs, or even selling office assets, it could really impact supply and property values in that market, notes Eltorai.

Key metrics to watch in 2025

One of the key metrics that Trepp has been watching closely in 2023, 2024 and 2025 is loan payoff rates. Taking office as an example of how the market is moving, as of December 2022, the one-year ahead modeled maturities for 2023 predicted that approximately 20% of office loans scheduled to mature that year would end up delinquent, meaning they would not pay off or get a modified extension. In 2023, the models for 2024 ticked slightly higher to 22%.

Retail is another sector that continues to face a sizable share of delinquent loans. Looking at the same one-year ahead modeled maturities, the maturity default rate for retail jumped from 11% in 2023 to 19% in 2024. What that indicates is that there is no real resolution, says Buschbom. “So what I’ll be looking for in 2025 is for those maturity default rates to potentially inflect downward,” he says.

Another important number to watch in the coming year will be CMBS issuance, and one of Buschbom’s predictions for 2025 is that there will be positive issuance in the CMBS space. Second, is that the office delinquency rate will increase from 11% at the start of 2025 to about 13% by mid-year. Depending on market conditions, that number could climb to 15%. “My call for 2025 is that we’ll hit somewhere in the mid-teens level for office delinquency, and that will be our inflection point, because issuance is going to be backfilling that denominator, and we’ll have cures rolling out of the numerator,” he says.

Although there is room for cautious optimism, investors also need to recognize the potential downside risks in the coming year, including bond yields and the cost of debt that could push higher if inflation ticks back up. On the positive side, Buschbom is excited to see how AI continues to play out. Productivity tends to be a very slow-moving metric, but it’s inevitable that the efficiency gains will start getting realized. “Something I think we can all agree on is that AI is fantastic – it’s game-changing and life-changing,” he says. “So, what I would like to see dominate in 2025 is that we have real adoption and measurable productivity gains from AI adoption.”

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