Survey Indicates Renewed Optimism for CRE Financing in 2025

When the companies that finance CRE offer a mostly positive view of the sector after months of lending that seemed to have diminished to little more than a trickle, developers and investors may also have reasons to feel cheerful.

The 3Q 2024 Sentiment Index survey of the Board of Governors of the CRE Finance Council (CREFC) presents an optimistic view. “The latest survey results signal a strong resurgence of confidence within the CRE finance industry,” commented Lisa Pendergast, CREFC executive director. “Market participants are preparing for growth and opportunity through year-end and into 2025.”

Interestingly, the survey was conducted from September 4 to September 12 – before the Fed announced a 0.5% rate cut on September 18, though it was widely anticipated. The Index tries to gauge quarter-to-quarter shifts in market conditions and outlooks.

The 3Q 2024 Index jumped 18% to 121.1 from 102.4 in the second quarter to its highest level since the Index was launched in 4Q 2017. The share of respondents expecting the economy to improve over the year ahead rose to 32% compared to 11% the previous quarter, though 57% expected no change. More respondents felt positive about the impact of legislative and regulatory actions on finance-related businesses. Some 85% anticipated positive effects from mortgage and cap rates – more than double the share who felt that way compared with 2Q 2024.

There was also an improvement in expectations for CRE fundamentals like occupancy, rents and net operating income, with 40% (up from 24%) feeling positive and negative expectations down to 23% from 30%.

Out of five finance executives, four foresaw growing investor demand for CRE/multifamily assets and a sharp increase in borrower demand for loans and financing. Fortunately for would-be borrowers, 77% of respondents anticipated improved liquidity and none expected it to be worse. The outlook for trends in CMBS and CRE CLO demand/spreads was also largely positive.

However, most respondents (77%) thought the impact of the hoped-for Fed rate cut would be modest, with a gradual improvement in market conditions. Some 20% thought the cuts would have limited impact because of other economic challenges and certain property dynamics, like office. Some 60% expected no meaningful recovery in CRE transaction volumes and property values until 2025, but 36% thought that would not happen until 2026 or later.

“As interest rates come down, marginal loans and properties that would have otherwise not been refinanced will get resolved without losses as debt service coverage ratios will become less of a constraint,” one respondent noted, adding that it won’t help properties that have major fundamental credit issues.

On the burning question of the future of the office market, 62% considered it would continue to decline, especially for older buildings, though newer amenity-rich properties would do better. However, 20% believed the fall in office values would be “moderate and contained.”

One respondent noted that rate reductions would benefit multifamily loan financing far more than office financing. “The values of office properties are not as correlated with rates as they are with demand, rents, and tenant/leasing costs, which will continue to be the cause of distress for Class B assets in many markets,” they said.

Another respondent pointed out that most lenders have already begun to reserve for losses on office loans but must decide how much loss they can afford to take.

Some respondents also noted that it was difficult to make predictions until the election gets decided.

“While challenges remain – particularly in the office sector—the overall outlook is more optimistic than in previous quarters,” Pendergast summed up.