CRE debt and capital markets are entering a new phase within the recovery
After muddling through a two-year period of dislocation and contraction, the CRE debt and capital markets are entering a new phase within the recovery, ushered in by the commencement of the Fed’s easing cycle. While the broader economy, financial markets and CRE marketplace still face uncertainty and bouts of volatility, it is important to keep focus on the sequential, cyclical nature of CRE debt and capital markets. We continue to track numerous positive inflections underway, reflected in both the hard data and in the multitudes of real-time, on-the-ground conversations we have with investors across the globe.
We decided to kick this series off with a focus on the debt markets, not only because the moves in the short-end of the curve have created direct shifts in the debt marketplace, but also because the positive traction witnessed throughout the debt markets in the face of significant recent bond market volatility is particularly compelling:
Key Trends Shifting the Tides:
- Rate-cutting cycle has loosened financial market conditions: The initiation of the rate-cutting cycle has eased financial conditions across the broader economy. The Chicago Fed’s National Financial Conditions Index (NFCI) has returned to index levels not seen since 2021, before the Fed’s restrictive monetary policy cycle began. Such looser financial market conditions are creating a ripple effect throughout the economy, allowing institutions and individuals with the ability to access debt and equity capital.
- Corporate bond market dynamics: Corporate bond yields have risen higher with base rates (i.e., risk-free rates), but spreads relative to benchmark rates have compressed to historically tight thresholds, reflecting not only the bullish outlook for the corporate sector specifically, but also the resilient outlook for the U.S. macroeconomy. These markets continue to signal a “risk-on” investment attitude.
- Growth in CRE lending origination volumes: CRE lending origination volumes were up 8% year-over-year (YOY) in 2024, highlighting that the worst of this cycle’s volumes are behind us and providing strong evidence that the acclimation phase is well underway. See Chart.
- Diversification of the CRE lending landscape: Lending activity will continue to broaden and diversify across lender types, particularly into Private Credit and CMBS channels as Bank lending remains constrained. Closed-End Debt Fund AUM expanded 6x-8x over the last two decades, outstripping other strategies; all as overall Debt Fund origination volume increased 44% YOY. CMBS also witnessed a renaissance; non-agency CMBS issuance volumes were up 170% YOY, measuring at upwards of $86 billion—reaching levels not seen since before the rate-hiking cycle began.
- Broadening lender activity: Beyond the diversification across lender groups, we also find that the pool of active lenders is broadening within lender groups. Unique lender counts (i.e., the number of lenders active in a given lender pool) have increased for a few lender segments; Financial (Debt Fund) lender activity has broadened by 55% relative to the 2015-2019 average, while the CMBS lender pool has expanded by 42% YOY relative to 2023.
- Tightening spreads and improving terms: CMBS debt spreads have continued their descent, tightening to thresholds below where they were when the rate-hiking cycle began (AAA spreads over swaps at 70 basis points (bps) in January 2025 versus 95 bps in March 2022). Life insurance debt has also grown more competitive recently, having compressed by roughly 40 bps since the 2023 peak. Increased competition to place capital should help keep CRE credit spreads across lender sources and debt type relatively contained for the foreseeable future.
- Public REITs re-enter the debt markets: Publicly traded REITS returned to the debt capital markets in 2024 having raised nearly $85 billion in securities (per NAREIT), surpassing the full amounts raised in each of the prior two years. The inflow of REIT fundraising, be it through stock or debt offerings, emerges as a strong leading indicator to eventual REIT portfolio expansion and acquisition activity ahead. Mirroring the broader tight-spread narrative, REIT unsecured spreads to the 10-year Treasury are trending upwards of 20-30 bps tighter than where they were when the rate-hiking cycle began.
- Improved CRE debt costs: Conventional, fixed-rate CRE debt costs, despite being subject to base rate volatility, are now trending 40-50 bps lower than the October 2023 peak. The slight contraction in base rates, together with the expansion of top-tier cap rates, has also introduced a new chapter of neutral-to-slightly positive leverage conditions, depending on sector and asset quality tier.
Strategic Recommendations:
- Don’t get caught up in the daily minutia: Accept that we are in a high volatility era and recognize that it is important not to get left behind, hyper focused on the frustrating realities of uncertainty and volatility. Caution, prudence, and risk mitigation differ from paralysis.
- Floating rate debt should be back on the table: With the short end of the yield curve expected to come in over the course of this year and next (with approximately 50 bps of cuts in each year expected from the Fed’s latest Summary of Economic Projections), consider securing short-term floating rate debt if the terms, strategy and deal profile are appropriate—particularly if you need more flexible terms.
- Take advantage of tight fixed rate debt spreads: Corporate bond spreads and CRE debt spreads are tight and growing even tighter as competition to place capital pushes them lower. If locking in longer-term debt, recognize that base rates in the low 4% range are pretty attractive, particularly given where spreads are trending.
- Anchor to a 4%-4.5% 10-Year Treasury: The zero-bound interest rate policies of the last decades were abnormal, and we should only expect that sort of policy under recessionary/contractionary macroeconomic conditions (which are lower probability scenarios). Apart from the volatility of base rates, the long end of the curve should remain in the low-to-mid 4% range, which is still consistent with nominal GDP growth in the 4% range.
Ultimately, the capital markets are shifting into a sequentially improved gear, building upon the meaningful traction witnessed last year; and a slew of indicators have inflected from their troughs. The year ahead will not be without its challenges, and we don’t expect pesky bond market volatility to dissipate entirely, but the foundation remains strong. 2025 will surely be characterized as a year of bifurcated, cautious, and gradual recovery. Fortunately, many sectors and markets will be on the positive side of that bifurcation, and a broad spectrum of debt liquidity trends, capital flows and allocation trends, and sector-specific tailwinds are all working in CRE’s favor, positioning it as among the most preferred alternative asset classes for the cycle ahead.
We look forward to reporting on more of these inflections and themes as they evolve throughout the year.
