Why Experts Expect Lending to Bounce Back in 2025
Lenders and investors are entering 2025 after navigating a tumultuous and uncertain environment shaped by various economic and political factors. The recent presidential election introduced significant shifts in expected government policy, coinciding with the Federal Reserve beginning an interest rate-cutting cycle. In 2024, the market was dominated by extend-and-pretend practices, allowing investors to retain assets without facing the strain of refinancing at elevated interest rates. However, the New York Fed has expressed concerns that banks and lenders may not sustain this approach much longer without assuming substantial risk.
Despite these challenges, bank balance sheets and reserve holdings have improved significantly since the Silicon Valley Bank and First Republic Bank collapses. Federal Reserve officials are confident the industry could weather a recession without major disruptions or failures. While banks are positioned to handle loan extensions into 2025, this strategy constrains economic growth and limits lenders’ capacity to expand operations. Extending terms on struggling office assets in major cities perpetuates a mismatch between tenant demand and the financial system’s investment focus. Rising property delinquencies, particularly in the office and multifamily sectors, suggest that lenders may soon redirect capital toward new opportunities rather than continuing to extend existing agreements.
Although much of the media discussion around commercial real estate loans focuses on banks, investors should diversify their capital sources to maximize value. Bank lending accounted for just 31% of the 2024 lender pool, down from 44% in 2022, reflecting a long-term trend. The number of U.S. commercial banks decreased by 70% since 1984, dropping from 14,400 to 4,375 by 2020. Heightened scrutiny of risk management at large and midsized banks has led many top players to scale back CRE lending, making non-bank financing increasingly beneficial for investors to stay aware of.
This reduction in bank lending has created opportunities for alternative capital sources. Life insurance firms have captured the largest share of annual growth, while other alternative lenders expanded significantly, providing crucial liquidity for investors in a shifting market.
Where are Credit Unions Winning Deals?
Credit unions offer several advantages for CRE investors, providing competitive rates and more flexible loan terms than many other lenders. They often work closely with investors to establish repayment periods and down payment requirements that suit both parties. Credit unions are particularly beneficial for private investors building their portfolios, as they prioritize direct relationships, offering guidance on risk, costs, and general investment principles.
Regional credit unions typically focus on smaller deals in secondary and tertiary markets, often under $10 million, though the largest credit unions can support larger transactions. This makes them ideal partners for investors targeting single-tenant retail properties, though they also fund a variety of asset types. However, as smaller firms with less overall capital compared to national or international banks, credit unions often require higher loan-to-value ratios from borrowers.
Unlike larger banks, credit unions tend to operate within specific metros or states, which can shield them from exposure to underperforming office assets in major cities like New York and Chicago. This localized approach reduces the risk of failure tied to distressed assets, making many credit unions a reliable choice for investors.
Heading into 2025, credit unions are in a strong financial position. As of Q2 2024, total U.S. credit union assets rose 3.5% year-over-year, positioning these lenders to increase activity after a cautious approach in 2023 and 2024.
Will Life Insurance Company Lenders Be Back Big in 2025?
Once again, Life Insurance Companies have increased their CRE lending market share to account for the pullback in bank lending in 2024, growing from 9% in 2020 to over 14% in 2024. These firms are looking for stable income streams for their accumulated capital and, for this reason, often offer very competitive interest rates for investors. While traditionally lenders for well-located and institutional-grade deals, the general slowdown in market activity has resulted in these lenders expanding the scope of deals they provide capital for. Beyond long term f ixed loans, this once again includes construction, bridge, and joint venture developments.
Life-insurance firms have been operating with near-record levels of net investment capital and revenue since 2022, with many of the major players recording substantial growth in 2024. These companies need to find a productive use for their capital, and increasingly, are choosing to lend on CRE assets. While the major players (think Insurance Companies advertising at PGA events) are taking down larger class “A” transactions, smaller correspondent Life Insurance Companies are lending Billions in the one million dollar to twenty million dollar transaction space. Matthews is proud to be an active correspondent and loan servicing partner with several of these active lenders across the product type spectrum
2025 is forecast to be another strong year for the insurance industry, both large and small. Having limited exposure to CRE relative to their overall investment totals, these lenders are of low risk of facing a credit pinch due to the scheduled debt maturities in 2025. With banks continuing to face scrutiny, and uncertainty about the future of bank regulations in the United States, insurance lenders will continue to fill the void left in the market just as they did during the financial crisis and other historical times of uncertainty.
Agency Debt is Back and Ready to Compete
Government Agencies supply CRE loans to foster investment and smooth the wheels in the housing market. The most active government lenders are Fannie Mae and Freddie Mac, but the Department of Housing and Urban Development and Small Business Administration also have programs for CRE lending. These programs often offer some of the most competitive interest rates available to investors, but also come with government oversight and more stringent lender requirements and maximums. Green-certified and affordable housing buildings are also eligible for additional cost relief.
Agencies have pulled back significantly from lending levels in 2021 and 2022, while maintaining a roughly even share of total CRE lending. The result is a build-up of available capital earmarked for CRE entering 2025. This capital is likely to target primarily multifamily deals, but also sub-categories of housing, like seniors and student housing. Once interest rates fall to a sufficient level to spark deal flow, agency capital will aid deal flow greatly over the next 12 months.
With dry powder targeting CRE near record levels, government agency debt could play a massive role in growing the transactions market next year. The buildup in available debt, in tandem with large investment firms getting ready to move off the sidelines, suggests capital may rush into the multifamily market once interest rates are sufficiently low and deals begin to pencil. If Fannie Mae and Freddie Mac are privatized or deregulated, as Trump’s team has suggested may occur, it will likely spur even more available capital to enter the market, providing upward pressure on deal volume and prices for CRE assets, however, privatization could also lead to higher lending costs.
In 3Q 2024, agency lending to multifamily CRE rose 40% quarter-over-quarter. This increase highlights how quickly agency capital could rush into transaction markets in 2025.
Forward Looking to 2025
With the Federal Reserve beginning rate cuts in September 2024, investors should closely monitor Fed statements and expectations throughout 2025. The forward-looking SOFR curve has fluctuated, with December 2025 rate projections ranging from 2.5% to 4.5%. The Fed’s trajectory will largely depend on economic data over the year. If inflation continues its retreat toward the 2% target and unemployment rises, the Fed is likely to accelerate its rate-cutting cycle. However, the terminal rate at the end of this cycle is expected to remain significantly higher than the near-zero levels seen during the 2010s. The “free money” era has ended. However, even modest rate cuts from current levels could unlock more opportunities for both buyers and sellers.
Despite consecutive Fed rate cuts, long-term Treasury yields spiked following the 2024 election, raising questions about the relationship between the two rates. While the Federal Overnight Rate influences the yield on 5- and 10-year Treasuries, other factors, such as economic conditions and investor sentiment, also impact Treasury yields and, by extension, CRE borrowing costs. Most CRE loans are tied to the 10-year Treasury, with lenders adding a premium to account for risk. Although the spread between Treasury yields and CRE interest rates has narrowed as lender confidence improves, rising Treasury yields have kept borrowing costs elevated despite falling spreads.
The increase in Treasury rates reflects renewed optimism about U.S. economic growth following the election. Investors view Trump’s victory as a catalyst for expansion, prompting capital to flow away from safe assets like Treasuries into growth-oriented investments, such as stocks and real estate. This shift has driven long-term yields higher. If the economy shows robust growth early in 2025, lending rates will remain elevated. Conversely, a softer growth trajectory with modest job gains could help keep rates lower. Either way, borrowing costs for CRE are likely to decrease as interest rates decline, though the timing of sustained downward pressure remains uncertain.
Several factors are aligning in 2025 to support a strong year for CRE lending and activity. On the lending side, the Federal Reserve’s rate-cutting cycle and narrowing lender spreads from the over-200basis-point levels seen in 2023 and early 2024 are reducing borrowing costs. These trends are making more deals financially viable for investors. Unless an unexpected economic disruption occurs, CRE markets are positioned for increased deal volume, rising prices, and compressing cap rates throughout 2025. This outlook is supported by The Mortgage Bankers Association, which forecasts a sharp rise in CRE lending over each of the next two years.
