The US commercial real estate (CRE) market is expected to face significant challenges in 2025, with underwater loans and distressed assets continuing to pose major risks, according to MSCI’s latest report. A key issue is the $500 billion in CRE loans set to mature this year, 14% of which are underwater—meaning the outstanding debt exceeds the current value of the assets. This problem is especially pronounced in the multifamily housing and office sectors.
Sector-Specific Risks:
- Multifamily Housing: Nearly $19 billion in multifamily loans, or 10% of maturing loans, are underwater. This is primarily due to high acquisition prices during the real estate boom of 2020–2022.
- Office Properties: The office sector faces even more severe challenges, with 30% of maturing office loans—totaling $30 billion—being underwater.
- Retail: Larger malls continue to struggle, with 80% of underwater retail loans tied to these underperforming assets.
- Industrial Properties: Older industrial properties, especially those built before 2010, are facing challenges related to obsolescence and functional limitations.
Market Adjustments and Emerging Opportunities: Despite the difficulties, some parts of the market show signs of improvement. Sales activity in central business district (CBD) office properties increased in Q4 2024, with price adjustments making these properties more attractive to investors. MSCI reported a slight decline in overall distress levels across the CRE market in the last quarter, though delinquent and foreclosed loans continue to be a separate challenge.
The Bigger Picture: While the pace of distress in the CRE market has slowed, the prevalence of underwater loans signals that recovery will be slow and difficult. Investors are increasingly looking for value in discounted properties, particularly those with strong tenant profiles. However, refinancing remains a major hurdle, especially for office and retail sectors, and will continue to test the resilience of the market in 2025.
The situation underscores the complexity of navigating the current CRE landscape, where structural challenges and overvaluation from the past boom and some current sector players continue to impact asset values and market stability.
