Six Trends to Watch in 4Q 2024: CRE Debt and Valuation Insights

A glimmer of optimism is appearing in the commercial real estate (CRE) market, with growing CMBS and underwriting volumes, and values stabilizing to rising slightly. That is according to the CRE Debt and Valuation Insights analysis, which leverages the boots-on-the-ground perspective of SitusAMC professionals across the organization, offering investors real-time market insights ahead of many traditional CRE data sources.  Here are six current trends to watch.  

#1 CMBS Market Shows Cautious Optimism  

Despite challenges, 2024 saw strong securitization volume, driven by conduits, particularly concentrated in the second half of the year, according to SitusAMC’s securitization team This positive late-year activity signals growth potential for the coming year. There have been signs of CLO recovery with increased interest from established sellers either going to market or returning to the market after sitting on the sidelines. In addition, concerns about refinancing risk, particularly large single-asset, single-borrower (SASB) deals, have eased, as a large percentage of these have extension options. Many of these are office loans. With the office segment showing nascent signs of stabilization, though still very weak, there is less of a refi risk than many originally thought. The SASB market has grown significantly and is expected to drive CMBS activity into 2025. 

#2 Alternative Lenders See Growth 

Underwriting performance has been strong, with some clients reporting record volumes that surpass even 2021 levels, according to SitusAMC’s underwriting, diligence and investment advisory team While new loan originations from larger bank lenders slowed late in the year, non-bank lenders have stepped in to capitalize on the opportunity. Retail, multifamily and hotel activity is heavy, while office activity remains light. The decline in bank activity may be strategic, with banks trying to match the securitization calendar if current deal activity is light, or they have already met their production goals. 

Our clients are anticipating strong volume in the first quarter of 2025, driven by inquiries related to balance-sheet lending for construction. Warehouse lending has also seen interest, with underwriting continuing to be heavily credit-focused. SitusAMC continues to do deeper dives in the CMBS sector; lenders are keen to secure approvals from rating agencies and B-piece buyers before closing deals. Deal outcomes are heavily dependent on B-piece buyer sentiment.  

Additionally, the industry is still grappling with the effects of multifamily fraud. Fannie Mae reported suspected fraud in its latest 10-Q filing with the Securities and Exchange Commission, and Freddie Mac has enhanced policies to combat fraud. SitusAMC’s team is being asked to expand its cope for multifamily properties to ensure rent rolls match leases, renovations are accurately represented on the balance sheet, and they have led to a sustained increase in rents for all tenants. Despite the news cycle quieting down, fraud remains a significant concern, including recent cases of investors inflating purchase prices and pocketing the difference.   

#3 Challenges Continue in Special Servicing  

SitusAMC’s special servicing team sees ongoing challenges, particularly in the SASB office loan market, where maturity defaults are prevalent. Many of these loans show evidence of borrower underinvestment, with tenant improvement (TI) packages of $10 million to $30 million, making owners hesitant to commit funds in an uncertain market with fluctuating asset values. This issue is evident in special servicing, but also on performing asset consents and operating advisor roles.  

Overall, the office sector remains the primary area of concern in special servicing, with market-specific dynamics driving outcomes and influencing tenant-retention strategies. Markets like New York are showing strength, while cities such as Philadelphia, Chicago and parts of Los Angeles remain weak. As a result owners are often resorting to competitive TI packages to attract tenants, often in the form of conversions to free rent. Looking forward, performing loans for office properties continue to face risks, with some large multi-floor credit tenants subleasing up to 30% or 40% of their space. Since these are often 10-year leases signed before COVID, issues may persist through 2029. 

There was a perceptible uptick in multifamily loans entering into special servicing in the last half of the year, mostly smaller deals valued at less than $10 million. On the SASB side, there are several post-COVID floating-rate deals affected by rising interest-rate cap costs. These loans are often non-recourse and borrowers are unsure if they have equity and are starting to defer maintenance.  

In hospitality and retail, SitusAMC special servicing has taken in a few large loans, including several hotel loans exceeding $100 million each, and a mall loan of more than $500 million. Retail, in particular, has shown signs of improvement compared to the challenges faced two years ago. However, these appear to be borrower- or property-specific and do not indicate broader trends. Finally, a self-storage loan exceeding $300 million was noted, but similar to hospitality and retail, performance appears to be deal-specific rather than part of a larger trend.   

#4 Loan Performance Depends on Market and Sector 

The SitusAMC servicing and asset management groupis seeing trends emerge across different markets and sectors. While San Francisco’s office market is still performing poorly, some of our clients are seeing positive developments in which borrowers are winning reduced tax assessments based on downward value adjustments--some after two years of appeals. This is resulting in significant refunds, including, in one case, an $800,000 payout. In contrast, Dallas’s office market is performing well, with increased deal activity and tenants expanding their spaces for the first time since pre-COVID. However, loan modifications are still required for most office deals, as refinancing remains rare, except in the multifamily sector.  

Meanwhile, industrial properties with higher power capacities are increasingly attractive to investors. Austin’s multifamily market is experiencing challenges in the aftermath of a significant increase in supply, with lease trade-outs down by as much as 21%. Life sciences properties are also facing difficulties, with limited tenant demand.   

Feedback from our clients indicates that many deals remain problematic, although some payouts are occurring, and requests for loan modifications and insurance waivers are rising. Higher insurance deductibles and lower availability of policies that are compliant with the loan terms are driving the increase in waivers.   

#5 CRE Debt Valuation Activity Rises  

SitusAMC is experiencing increased volume, driven by internal growth among clients and rising demand for CRE debt valuations for particular loans. Lenders are optimistic, partly due to market stabilization and a broader acceptance of current interest rates. Private credit lending and the non-bank lending sector are expanding significantly. For example, insurance companies are spinning off asset management units to attract third-party investments and maximize internal staff productivity. 

Private credit lending spreads have tightened and the market has become more stable, supporting lending activity. While challenges remain in the office sector, many borrowers are pursuing “amend and extend” strategies, hoping for positive market shifts, which have already evident in some regions.   

#6 Fourth-Quarter Values Appear Flat in Aggregate  

SitusAMC’s real estate valuation services team is seeing fourth-quarter valuations generally flat in aggregate, with value changes primarily a function of net operating income (NOI) growth instead of rate compression. While values overall will likely come in flat, it is important to keep in mind that most of SitusAMC's clients are within the NCREIF universe, and have equity portfolios typically composed of about 35% industrial, 30% apartment, less than 20% office and 10% to 12% retail. Office portfolio allocations have come down 15 to 20 percentage points over the last five years, primarily a function of values declining 40% over the past two years. SitusAMC expects value erosion to continue into 2025.  

By property type, we are generally seeing values in the industrial, apartment and retail sectors flat to slightly up. Industrial values are mostly being driven by NOI. The average weighted-average lease term (WALT) is a little over five years, with contract-to-market rent ratios of about 70%. The industrial sector has experienced NOI growth between 8% and 10% per year for a few years. That should continue over the next several years because of the WALTs and contract to rent ratios. Apartment values are also being driven by NOI and a stabilization of expenses to some degree.  

Retail is experiencing strong NOI growth, driving some of the value change. Some pockets, such as smaller, grocery-anchored retail, are in demand and seeing some cap rate contraction. Office remains very challenged, but there are the haves and have-nots. Most office on the market is commodity product, with only a select few that are top-tier and offering all the amenities that tenants are demanding. However, it is important not to paint a broad brush across all office, as values are heavily asset specific. 

Learn more about SitusAMC’s Valuations and Advisory Services on our website.