A Look into CRE Finance for the Year 2025

Survive to ‘25 was what we were told, but then what?  As we close the books on 2024 much has changed, and yet much remains the same.  Here are my thoughts on the year that was, and things I am watching in 2025:

First the highlights of 2024:

1. The FED started cutting short-term rates in September, and long-term rates have pretty much gone up since then. Who would have thought??
2. We started seeing a noticeable uptick in transaction volume in early summer, which coincided with the low in treasuries, and the volume has remained strong since then. This bodes well for 2025, more on that below.
3. CMBS will have a very strong year, with issuance on pace to top $100B, a level last reached in 2007 and 2021.
4. On a case-by-case basis, we are seeing compelling terms from banks and credit unions as the SVB/FRB repercussions settle in, and rates on the short end of the curve ease with the FED cuts.
5. For better or worse, we had a decisive election outcome in November and the playbook for the next four years is starting to take shape.
6. Rates seem to be finding a range they want to live in, and the spreads continue to tighten, so in general, this is creating a strong environment for the debt capital markets.

Here are my thoughts for 2025:

1. Liquidity – In the last two years, the U.S. government has been flooding the economy with liquidity through deficit spending, the drawdown of the reverse repo facility, and the treasury general account (TGA). I won’t get into the details on this, except to say that since 2022 – around the time the stock market was down about 25% or so – the floodgates were opened and liquidity started pouring into the financial system. To give you an idea of scale, the U.S. budget deficit this year alone will be $1.86T and the FED’s reverse repo facility went from a high of $2.6T in 2022 to a low today below $200B. It makes sense that the stock market is up 50% in two years, gold almost 50%, and Bitcoin is almost 5x. Credit spreads for investment grade all the way down to junk bonds are the tightest they have been in 20 years. Be wary though, for as much liquidity as is currently in the system, there is a huge wall of corporate and commercial real estate debt that is coming in 2025, 2026 and 2027 that needs to be rolled over.  My advice to clients next year is do not miss this point in the market to term out upcoming debt maturities, and don’t assume a good deal will be there tomorrow if you pass on it today.  Supply and demand for debt should be in balance.
2. U.S. Economy and Employment—What has surprised many market observers, me included, and has been providing a strong tailwind for the economy and consumers is simply the fact that we continue to have labor supply below labor demand. The U.S. economy remains strong, and we should be cheering the prospect that the FED doesn’t have to cut rates as much because the economy continues to run warm.
3. I expect 2025 to be significantly stronger for transactions than the previous two years, for the following reasons:
   1. Short-term rates continue to come down, so development deals will start to pencil again.
   2. Equity investors, especially those who must maintain a percentage of their portfolio allocated to real estate, express more interest in deploying capital.
   3. The mirage of low rates continues to fade with each passing month, and the longer the volatility continues in the bond market, the more owners are starting to lose their resolve to hold out (or are second-guessing themselves entirely).
   4. More investors and/or banks with upside-down deals are starting to clear the decks.
4. Interesting deals continue to be found in the less talked-about asset classes; those include single-story office, boutique hospitality, small-bay industrial, and industrial outdoor storage (IOS).
5. Anything BTR and SFR continues to be hot, with an increasing number of eyeballs on this sector, as well as the capital flowing to it.
6. The Eurozone and Chinese economy are in bad shape. France and Germany’s economy are worse than people know, and I predict we will see QE in Europe before the end of 2025. On the other hand, China will need to ultimately devalue the yuan drastically to deal with their problems (There are reports that there could be 100 million homes sitting empty in China). It is uncertain if this happens soon, but that would put China on a collision course with Trump and the tariffs he’s talking about enacting. It is smart to pay attention to the headlines across both oceans and be ready to capitalize when we get lower treasury yields.

Have a happy and healthy holiday season. Let’s get ready for a great new year!