Some of the largest commercial real estate finance companies are expressing more concern about the year ahead than they have since 2023. 

The third-quarter survey from the CRE Finance Council found that its index of industry sentiment fell 17.5% from last quarter, reaching its lowest point since the third quarter of 2023. The index's reading of 83.3 was also 34% below the record high of 126.6 set in the final quarter of 2024. 

More than 90% of respondents said mortgage and cap rates will likely weigh on CRE finance businesses over the next year, though their worries didn’t end there. 

“Our members' concerns now extend past the next Fed decision to inflation, fiscal deficits and the outlook for long-term borrowing costs,” CREFC Managing Director Raj Aidasani said in a statement. 

He said the economy was the key item to watch, as nearly two-thirds of respondents expect it will weaken over the next year. If that happens, weaker rents and cash flow will compound the strain on borrowers who are already dealing with higher rates and maturing loans.

The sentiment index results come from a survey of the CREFC Board of Governors, which is represented by senior executives from major commercial real estate finance firms such as TPG, Starwood Property Trust, Apollo Global Management and KKR.

Financing demand showed signs of deterioration as borrower demand turned net negative for the first time since the end of 2022. Just 24% of respondents anticipate stronger demand for CRE and multifamily financing over the next year, compared to 35% expecting demand will weaken.

Investor demand expectations are evenly split, with 30% expecting more demand and 30% anticipating less.

Liquidity remained relatively stable for most respondents, though concerns are rising. While 65% expect liquidity to remain unchanged, the share anticipating a contraction jumped from 5% last quarter to 24% in Q3. 

The CRE finance executives don't expect a major decline in long-term interest rates happening before the end of 2026. 

Yields on 10-year Treasury bonds cleared the 5% mark in mid-September, pushing up borrowing costs and threatening momentum in commercial real estate capital markets. The Federal Reserve then raised its benchmark interest rate for the first time since 2023.

More than three-quarters of survey respondents predicted that the 10-year Treasury yield will be 5% or higher by year-end. Just 21% expect it will be below 5%. 

Expectations for CRE fundamentals like occupancy, rents and net operating income also turned net negative for the first time since early 2025. Nearly a third of respondents expect fundamentals to worsen, up from 11% last quarter, while just 22% expect them to improve.