Looking at Commercial Real Estate in 2025
Terrydale Capital
Oct 22, 2024 8 Min read
With Q4 2024 in full swing and an election on the horizon that boasts large implications for the commercial real estate market and the market in general, 2025 is poised to be an important and interesting year. In addition, the recent Fed rate drop as well as the proposed additional drops before the end of the year seek to lessen the load on the economy. While the effects are not instantaneous, their effect will be felt in 2025. With that said, it is important for investors to look forward and prepare for every angle that may come in 2025.
Rate Drops and Their Effects
While the Fed dropped rates in September, many expected immediate relief. However, it was not the slam dunk many hoped for. Those hoping for an immediate reprieve in the market found themselves disappointed. This isn’t a bad thing, and it is no cause for concern. It will still take time for the effects of the rate cut to become more felt within the economy. This means that many will still hold out into the new year.
The Wall of Maturities
This year, maturities will hit $950 billion with an estimated peak to hit in 2027 of nearly $1.26 trillion is estimated to mature. The rate environment since 2022 has put significant pressure on commercial real estate investors. The worry turns to borrowers who fail to refinance or default on their loans which would lead to significant pressure on the commercial real estate market and pose significant losses to lenders.
Those seeking a refinance are all being hit with rate shocks as many of their rates initially would refinance higher. As of August 2024, the average rate for originated loans sat at 6.2%, but many loans maturing had a rate average of 4.3% - a shocking nearly 200 basis point jump.
A close eye will remain on office assets. Office only accounts for 10% of all maturities coming due, but the rise in delinquency and empty assets due to the shift to more remote-based work post-pandemic has led experts to keep a wary eye.
Getting Ahead of Documents
Operating on a tight timetable requires a lot of preparation beforehand. One of the often overlooked aspects of preparing for an acquisition or a refinance - that is often left until crunch time - is personal financial documentation. From Personal Financial Statements (PFS), Schedule of Real Estate Owned (SREO) and readily available tax returns, having these documents at the ready is crucial for being able to make time sensitive moves in the market.
When it comes to the general property documentation to be prepared for an acquisition, having a trailing 12-month profit and loss (P&L) statements, rent roll as well as a copy of the sales contract (or sales price if not yet under contract) are crucial metrics to get the financing process rolling. Depending on the property type or financing type sought, certain document requirements may change or be needed. Being in the know of what will be necessary beforehand is imperative for investors to make their financing processes as smooth as possible.
In regards to refinancing, in addition to some of the documents stated above, it is important to bring documentation of the current lender, the current loan balance and the current maturity date.
Turning An Eye At Banks
In Q2 2024, some larger banks sought to sell off some of their commercial loan portfolios in order to recuperate some of the incurred losses due to delinquent and failing commercial loans as well as other rising delinquent consumer debts such as auto loans and credit card debt. Many large banks are preparing for a large hit as more commercial loans fail and individual debts sit at an all-time high. Many of these large banks have set aside large sums of cash in order to cover these losses as well as raising their reserves.
Smaller regional banks have been relatively spared the pressure on their commercial loan portfolios but are not completely immune with them still presenting some similar struggles of larger banks. Unlike larger banks, smaller banks have not bitten off more than they can chew in these scenarios.
In Conclusion
With many factors yet to unfold yet this year, there is still much speculation on how Q1 2025 will turn out. However, it always pays to be over prepared in the event of favorable market changes. In efforts of getting prepared, having the right team behind your investment endeavors can not only simplify the process but ease the often heavy burden of the financing process. When you need the right team by your side, Terrydale Capital is at the ready. Contact us today!
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Headquartered in Dallas, Texas, Terrydale Capital is a leader in commercial real estate financing. We have close relationships with the nation’s top banks, lenders & family offices allowing us to provide the most competitive financing solutions in the market.
