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Trends in commercial real estate (CRE) lending and risk

Mary Ellen Biery

January 24, 2025

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CRE origination, refinancing, and pricing challenges

Experts from Trepp and Abrigo describe recent origination and delinquency trends in commercial real estate portfolios. They also share tips for managing risk and pricing.

Key topics covered in this post:

The big-picture view of CRE from Trepp
Trepp bank consortium originations are 58% below pre-COVID averages
Rising delinquency rates, especially in specific markets
How to manage CRE risk and pricing

Changes in the commercial real estate market

Fluctuating interest rates, sector-specific challenges, and evolving borrower needs are reshaping the commercial real estate (CRE) market. As a result, financial institutions with CRE concentrations find it increasingly important to strategically manage the competitive pressures and risks related to origination, refinancing, and loan performance.

Understanding broad market trends and the specific forces affecting bank and credit union portfolios can guide institutions’ decisions while helping them prepare for examiner scrutiny of CRE risk, according to a recent Abrigo webinar, “Being strategic with your CRE.”

During the webinar, experts shared data and insights about CRE lending trends and offered advice for managing related risks.

We can help you set up stress testing that's right for your loan portfolio.

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Half of lenders polled see "some deterioriation" in CRE

In a webinar poll by Abrigo, 49% of respondents reported that their institutions are starting to see deterioration in some, but not all, segments of the CRE portfolio. Less than 10% saw any general deterioration in their commercial real estate loans.

While respondents weren't generally worried about their CRE loans as a whole, many still foresee the office space being an issue.

More than two-thirds of respondents identified office as the CRE loan type at most risk of deterioration over the next year.

CMBS: A broad lens on commercial real estate activity

Hendry

Lonnie Hendry, Chief Product Officer of CRE data and analytics provider Trepp, said the commercial real estate market shows recovery in certain sectors and persistent challenges in others.

Issuance of commercial mortgage-backed securities (CMBS) rebounded sharply in 2024, with volume jumping 155% year-over-year to more than $100 billion. However, office properties struggled to attract lenders, with their share of CMBS issuance shrinking to under 8% by late 2024, compared to 20% in early 2023.

Instead, single-asset and single-borrower loans accounted for much of the growth, reflecting lenders’ focus on high-quality deals amid ongoing economic uncertainty. Industrial properties led the way, supported by e-commerce demand and consistently high occupancy rates, according to Trepp data.

“Industrial property has been the darling coming out of COVID,” Hendry said. The property type was about 20% of total issuance in 2024 compared to just under 15% in 2023.

Hotels have been another positive surprise since COVID, with significantly stronger occupancy across the lodging sector and all-time highs in revenue per available room (RevPAR) and average daily rate, he said. Meanwhile, retail properties started to see some headwinds in the form of store closings announced in late 2024 by the likes of CVS and Walgreens.

Although CMBS data illustrates broad market dynamics, financial institutions contend with unique challenges. As Trepp’s analysis highlighted, their reliance on relationship-driven lending and tighter funding conditions make their experiences more nuanced.

Origination pressures for financial institutions

Trepp manages a data consortium that includes $300 billion in CRE held in total by some 25 banks. Among that group, CRE origination volumes by mid-2024 had fallen to levels 58% below pre-COVID averages in 2019. Bank originations from the group were less than $4 billion in the first quarter of 2024, compared to $10 billion in the same quarter of 2020.

Various sectors saw even steeper declines from the 2019 averages as tighter margins and risk concerns slowed new loan approvals:

Retail origination: 78%
Office origination: 65%
Multifamily: 61%

“There's a number of factors that go into that, but it's pretty telling to me that the tightening cycle that the Fed undertook had a significantly worse impact on originations than COVID did,” Hendry said.

CRE refinancing trends: More challenges

Refinancing has brought its own set of challenges for lenders of all types. Trepp estimates that more than $100 billion in securitized debt that was initially to mature in 2023 has not been paid back, with many borrowers unable to meet higher debt service requirements.

“Extensions and modifications are being used as interim solutions, but they often just kick the can down the road,” Hendry said. “The challenge here is that you're effectively betting on better financial conditions, lower interest rates, stronger occupancy, lower cap rates, increasing the value of these assets. And in some cases, that's not going to play out, unfortunately.”

He expects some lending institutions or note holders will divest some of their non-performing office assets in 2025 as they target where their exposure is.

“The good news is that we did an analysis about two months ago where we looked at the top 100 bank holding companies across the U.S., and the average exposure to office in their CRE book was between 10 and 20 percent,” he said. Only a small percentage of offices were dilapidated or non-viable office buildings.

Rising delinquency rates highlight growing risks.

Nevertheless, rising delinquency rates provide further evidence of stress within CRE portfolios.

Office delinquencies for Trepp’s bank consortium hit 7% by late 2024. That’s well above historical norms but better than the 10.38% observed in the CMBS market by Q3, according to Hendry.

“While the delinquency numbers are favorable at this point for the bank lenders as compared to CMBS, if you look in their portfolios, there are some markets that are heavily criticized, and those loans, by definition, at some level will convert to delinquency,” he said.

Multifamily properties in high-growth Sunbelt cities like Atlanta and Phoenix face elevated criticized loan volumes after aggressive origination between 2019 and 2021. Senior housing and aging office buildings add to the pressure. Delinquencies reflect the ongoing challenges posed by older, less competitive assets.

“The Class A glass-and-steel office buildings are doing really well,” Hendry noted, “but it’s the middle, functionally obsolete Class B stuff that’s struggling.” For example, Trepp data shows that 63% of office loans in San Francisco were categorized as “criticized” by the second quarter of 2024.

Managing CRE and pricing

Newberry

Abrigo Senior Consultant Rob Newberry said understanding the market will be important as lenders go through 2025. Managing their current risk is vital, too.

Stress testing plays a critical role in helping financial institutions understand vulnerabilities within their CRE portfolios. “Stress testing describes the techniques used to assess what happens if you were wrong when you underwrote the credit originally,” Newberry explained. This process helps institutions model worst-case scenarios, such as rising delinquency rates or declining property values. It also helps banks and credit unions evaluate their potential impact on earnings and capital ratios.

Pricing strategies are also important for lenders to balance new loan opportunities and CRE risk management. Newberry said competitive pressures often influence pricing more than sound risk-based strategies.

'Takes one bad pricer to make everybody a bad pricer.'

“It only takes one bad pricer in your market to make everybody in the market a bad pricer,” he cautioned.

Underpricing loans to match competitors can erode net interest margins and create long-term risk exposure. Flexible loan products, such as hybrid rate structures or extended amortization periods, can help borrowers adjust to rising costs while maintaining balance sheet health, he added. Abrigo advisors can help devise loan pricing strategies to achieve financial institutions’ strategic goals. They can also help with building stress testing calculations and interpreting results of stress tests.

Adding to pricing challenges: the complexity of the CFPB 1071 regulation for small business lending data collection. The rule requires financial institutions to collect and report data on small business loan applications, including certain CRE loans.

Newberry cautioned lenders to ensure their practices are defensible. “Disparate pricing strategies or exceptions that aren’t consistently applied could unintentionally cause regulatory concerns or even reputational risks,” he said. Financial institutions can mitigate these risks by prioritizing consistency and transparency in pricing while supporting borrowers.

Hendry and Newberry said challenges related to the impact of higher interest rates on CRE are likely to drag out for longer. Combining market awareness, rigorous CRE stress testing, intentional pricing strategies, and attention to regulatory compliance with 1071 will position institutions for long-term success in this complex market.

This blog was written with the assistance of ChatGPT, an AI large language model, and was reviewed and revised by Abrigo's subject-matter expert.

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