Debt Market Stabilization Hides A Wave Of Maturing Loans And Potential Shocks

The commercial real estate market showed signs of stabilization by the end of 2024, with liquidity, deal volume and pricing all improving, according to the latest MSCI Real Assets U.S. Capital Trends report. In February, investment volume was 5% higher than a year before, while the RCA CPPI U.S. National All-Property Index was up 1.3% year-over-year.

However, economic shocks from tariffs could cause problems down the line, said Jim Costello, chief economist of MSCI Real Estate Research.

“The real estate market is not moving anywhere near as quickly as the news cycle,” he said. “At the end of last year, liquidity was improving for lenders, deal volume was rising, pricing was increasing. Now, there is volatility, but it will be months before the current noise is reflected in transactions.”

The impact of tariffs on CRE will take time to be apparent, Costello said. Much of the impact depends on whether there is a general decline in economic activity or whether businesses are able to absorb extra costs. MSCI Real Assets is starting to hear of clients retrading mid-deal, negotiating a new price because conditions have changed, he said. 

But even if economic growth slows enough to spark a recession, there will be opportunities on the debt side, Costello said. As interest in equity declines due to uncertainty and higher risks, more investors are likely to put money into the debt portion of the capital stack. 

“If you’re becoming more uncertain about the future on the equity side, this could raise an opportunity for investors deploying money in the debt fund world,” he said. “While there might still be a low return for debt, the risk of losing money is lesser.”

The MSCI Real Assets report details a shift in the debt market by the end of 2024 in terms of lender composition. There was a 143% increase in loan volume from CMBS sources in February 2024 on a year-by-year comparison, while the loan volume of investor-driven sources such as debt funds rose 47%.

MSCI Real Assets also analyzed the types of buyers making distressed purchases in this property cycle versus the cycle following the 2008 financial crash. The share of distressed investment by private buyers rose to nearly 65% between 2023 and 2024, up from 44% between 2010 and 2013, said Alexis Maltin, executive director of MSCI Real Estate Research.

“This is because a lot of distressed assets in this cycle require refurbishment and present value-add opportunities,” she said. “They’re not simply distressed because of bad debt, as was the case last time. This is often the specialty of private buyers who are more willing to invest in retrofitting than institutional investors who need to start seeing a return immediately.”

Maturing loans will be interesting to watch during 2025, Maltin said. The volume of U.S. commercial property loans set to mature in 2025 exceeds $625B, according to the MSCI Real Assets analysis. 

This could particularly be a challenge in the apartment sector, where many loans originated three years ago amid very low interest rates and record pricing, she said. Since then, rates have increased, while MSCI’s CPPI report showed that apartment values declined by 1.3% in the last year and by 18% since the peak in 2022. 

“This value loss could pose an issue for investors,” Maltin said. “We are seeing the notion of modified extensions — when lenders are willing to modify the current terms of the loan. But lenders' willingness to extend or modify a loan depends on the cash flow capabilities of an asset as well as whether they believe prices are going to improve over the near term and what the outlook for interest rates may be.”

Overall, while the impact of economic uncertainty will take awhile to become apparent, investors and lenders will still be looking for the best opportunities, Costello said. Debt funds took on a much greater share of the construction lending market in 2024, a trend that will continue to play out for the coming months.

“Clients are trying to process new information, which could impact trade flows over the coming months, but this won’t happen overnight,” he said. “Typically, when there’s been a shock, there’s a tendency for investors to wait at first, especially on the institutional side. Private capital is generally more willing to take risks.”

To read more of the MSCI Real Assets analysis of capital trends, download the full report. 

This article was produced in collaboration between MSCI and Studio B. Bisnow news staff was not involved in the production of this content.

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