The tightening of monetary policy and shifting market preferences in the United States have heavily impacted the commercial real estate market, raising concerns about the ability of mortgage borrowers to meet their loan obligations. By 2025, about
, with multifamily and office buildings accounting for the largest share. Most of these loans were taken out at a time when interest rates were at a record low; however, the reopening of the global economy after the pandemic brought change in the mortgage market. To tame soaring inflation, the Federal Reserve
. While the delinquency rates of most commercial property types remained below 2021 levels as of March 2023, real estate investors with loans up for renewal are likely to face dramatically higher borrowing costs in the future. Offices, for instance, already saw
Concerns about the health of the office sector
Office real estate in the U.S. accounted for over
one-fourth of the commercial mortgage-backed securities (CMBS) outstanding in the first quarter of 2023, making it an important part of the commercial mortgage market. In recent years,
the office sector has undergone a major transformation: The coronavirus pandemic and the adoption of hybrid or remote work have turned office spaces from the default workplace to a place where employees go to socialize and collaborate. As a result, many companies have downsized, and demand has shifted toward more modern, and functional spaces, leaving many older buildings struggling with occupancy. The combination of these factors has led to a two-speed market,
an increase in vacancy rates, and reduced cash flow for the landlords of the properties affected. Cap rates – a measure of the expected return on a property –
have surged since 2021, reflecting the increased risk for investors. With occupancy declining and office prices on a downward trend, investors may struggle to prove sufficient cash flow, fail to refinance their loans, and eventually file for foreclosure.
Why does the health of the commercial real estate mortgage market matter?
Worth
3.6 trillion U.S. dollars in debt outstanding in 2022, the commercial real estate mortgage market is a crucial part of the financial landscape, involving a wide range of investors and lenders. A poorly performing market can have an adverse impact on portfolios and lead to financial losses and cashflow disruptions. That is especially important for banks and thrifts, which are
the biggest group of commercial real estate lenders and have been under increased scrutiny since the failure of several regional banks at the beginning of 2023. Along with various institutional investors, banks are also exposed to commercial real estate through the CMBS market. Holders of non-agency CMBS
held about 0.5 trillion U.S. dollars worth of commercial real estate mortgage assets. Because CMBS represent pools of loans, they also provide a degree of diversification; nevertheless, they are not immune to the changing market conditions.
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