The below chart shows current SOFR and 10-Year Treasury Index forward curves which can be useful for forecasting, but should not be viewed as predictive of actual future interest rates. UST forward curves represent future yields based on observable market data (futures contracts, market swap rates, and current outstanding Treasury Instruments), while the SOFR forward curve represents market-implied future setting for 1-Month Term SOFR.

Commercial Property Lending Rises Annually, Led by Life Insurers
U.S. commercial property lending increased last year, primarily driven by a surge in loans from insurance companies. The Mortgage Bankers Association (MBA) reported a 3.7% rise in commercial and multifamily mortgage debt outstanding at the end of 2024 compared to the previous year. Life insurance companies led this growth, accounting for nearly 39% of the annual increase in commercial debt, while bank holdings grew by just 1%. Insurance companies have historically been cautious underwriters, with their commercial mortgages typically having lower loan-to-value ratios and backing properties with high net income streams. This conservative approach has kept their mortgage performance relatively stable. The MBA also noted that multifamily mortgage debt grew by 1.8% in the fourth quarter, continuing to outpace the overall nonresidential commercial market. Despite challenges such as low occupancy rates and the uncertain impact of return-to-office mandates, delinquency rates remain relatively low. Banks reported a slight increase in loan delinquencies, while life insurers saw a decrease. The article underscores the resilience of the commercial property lending market amidst evolving economic conditions.

Lender Composition 2024
In 2024, CMBS (Commercial Mortgage-Backed Securities) and investor-driven lenders made a strong comeback in the debt market, highlighting the growing strength of non-bank lenders. Banks, on the other hand, lost significant market share, and government agencies slightly reduced their lending activities, indicating a shift away from traditional lenders.

CMBS originations surged, capturing a 22% share of the market due to a 143% year-over-year increase in loan volume. Investor-driven sources, such as debt funds, also saw a 47% rise in loan volume compared to 2023. CMBS led in large loans (over $50 million), accounting for 46% of such originations, with the average loan size increasing to $26.2 million. Securitized lending had one of the lowest average loan-to-value ratios (LTVs) at 61.3%, second only to insurance lenders, who prioritize safer loans. CMBS lenders targeted higher-quality properties, as evidenced by the decline in average cap rates on newly originated loans to 6.9% in 2024 from 7.2% in 2023.



Banks' overall market share fell to 28% in 2024 from 40% the previous year. Regional and local banks' share dropped to 17% from 26%, while national banks' share declined to 8%, a decade low. Despite this, regional and local banks continued to dominate smaller loans, providing more than half of loans under $10 million. Government agencies also saw a reduced share of originations, down to 24%, which is still slightly above their average in the five years before the pandemic.

On Again, Off Again: Tariffs & Commercial Real Estate
President Trump has imposed tariffs of up to 25% on certain goods from America’s top two trading partners—Mexico and Canada—and an additional 10% tariff on goods from China, the country’s third-largest trading partner. Additional tariffs are also being considered. Exceptions were granted until April 2 for imports from Canada and Mexico covered under the USMCA.

Economists generally agree that these tariffs, which have already caused sharp volatility in both bond and equity markets, will slow short-term economic growth and increase inflation. In the long term, tariffs may encourage some companies to boost domestic manufacturing activity.

Industrial and retail property fundamentals will experience the most immediate impacts from tariffs if consumer spending power is reduced and the flow of goods shifts. The office market recovery should continue, barring an economic downturn. It is expected that some large industrial occupiers may delay signing leases in the near term, with third-party logistics (3PL) companies accounting for a larger share of leasing activity as more businesses rely on them amid uncertainty.

Privatization of Fannie Mae and Freddie Mac Could Increase Costs and Tighten Credit for Multifamily Loans:
The privatization of Fannie Mae and Freddie Mac could significantly impact commercial multifamily loans. Currently, these entities provide substantial liquidity to the multifamily lending market by purchasing loans from private lenders and packaging them into mortgage-backed securities. Privatization could reduce this liquidity, as a privatized Fannie Mae and Freddie Mac might face higher capital costs, which could be passed on to borrowers in the form of higher interest rates. Additionally, privatization might lead to tighter credit standards, as the focus could shift towards more profitable, less risky segments of the multifamily market, potentially leaving affordable housing developers and lower-credit borrowers with fewer options. Without government backing, the cost of capital for Fannie Mae and Freddie Mac could increase, leading to higher borrowing costs for multifamily loans. This could make financing more expensive for developers and investors, potentially hindering new projects and limiting the availability of affordable housing. On the positive side, privatization could foster increased competition in the multifamily lending market, diversifying the sources of capital available for multifamily financing and potentially introducing new products and innovations that improve market efficiency. However, the specific mandates of Fannie Mae and Freddie Mac to promote affordable housing, including multifamily housing, could be jeopardized, making it more challenging to finance affordable housing projects, especially in low-income areas. Overall, while privatization could lead to increased competition and market diversification, it also poses risks of reduced liquidity, tighter credit standards, and higher borrowing costs, which could negatively impact the availability and affordability of multifamily housing.

Capital Markets Pros Believe Cap Rates Have Peaked
The Below presents the results from the four most recent Cap Rate Surveys (CRS) for all property types. In the latest survey, conducted in November and December 2024, fewer respondents believe cap rates will increase compared to the previous three surveys. The most common response for all property types was "no change."

Although office properties still have the highest share of respondents expecting further valuation declines, this proportion has significantly decreased over the past two years. The outlook for offices is improving, especially for prime properties in major central cities. However, the outlook is less favorable for suburban office markets, where investors continue to demand a risk premium due to weak fundamentals and a lack of prime spaces. This bifurcated performance in the office market is expected to persist.