The Commercial Real Estate Reckoning Continues: Moody’s Forecasts Steep Declines Ahead
The commercial real estate (CRE) market is facing a reckoning as higher interest rates, changing
work dynamics, and economic headwinds converge to batter property values. According to a new
report from Moody’s Analytics, the outlook for the CRE sector is bleak, with valuations across all
property types expected to decline as much as 10% peak-to-trough over the next 18 months.
The office sector will bear the brunt of the pain, with Moody’s projecting a staggering 26% plunge
in values by the end of 2025. This dramatic drop is driven by companies adjusting to remote and
hybrid work models, leading to reduced office space needs and a flight to cheaper, more desirable
properties.
Moody’s warns that an above-average amount of CRE debt will mature this year and in 2025, with
many loans featuring large balloon payments that will need to be refinanced at much higher
interest rates. “Even with interest rates expected to inch down this year, borrowers will have to
refinance at a much higher interest rate, increasing the risk of cash flow issues,” the report states.
This refinancing crunch poses a significant threat, as Federal Reserve Chair Jerome Powell has
acknowledged that CRE losses will mostly impact small- and medium-sized banks, which have
higher concentrations of troubled loans. Powell cautioned that efforts to ensure financial stability
will need to persist for years as the industry navigates this challenging environment.
The pain is not limited to the office sector. Moody’s forecasts a 5% decline in multifamily CRE
values over the next six quarters, as new supply comes online even as renters face affordability
constraints. Industrial and warehouse CRE are also expected to see setbacks of 5.7% and 6.6%
respectively, while retail CRE prices are projected to fall 8% over the next five quarters as online
shopping continues to erode brick-and-mortar sales.
The Moody’s report paints a stark picture of the CRE market’s dramatic shift. After a period of price
appreciation fueled by easy money policies and investor demand as a hedge against inflation, CRE
values have tumbled 11% since the Federal Reserve began its aggressive rate hike campaign in
March 2022. This has erased the gains of the prior two years, and Moody’s warns that “lending
standards on CRE loans have grown tighter since the midpoint of 2022.”
As the CRE industry navigates this challenging environment, property owners, lenders, and
investors will need to exercise caution and prudence. The path to stability and recovery remains
uncertain, with the prospect of higher interest rates for the foreseeable future. Careful
underwriting, proactive risk management, and a clear-eyed assessment of market conditions will be
essential for weathering this storm and positioning the CRE sector for sustainable long-term
growth.
About the author: Myles Lichtenberg, Esq., is a recognized leader in the real estate title insurance industry. Since 1979, Mr. Lichtenberg, and his amazing team, have conducted well over 27,000+ real estate title transactions and over $16 Billion Dollars of settled transactions, involving just about every type and variety of real estate configuration — from commercial to residential, from complex to simple and from single-state to multi-state portfolios.
