As we head into 2025, the outlook for commercial mortgage-backed securities (CMBS) reflects the mixed signals emerging from the broader real estate and economic landscapes. CMBS, which bundle commercial mortgages into securities for sale to investors, will likely continue to be shaped by a complex interplay of macroeconomic factors, property sector performance, regulatory shifts, and investor sentiment.

  1. Interest Rates and Inflation

Interest rate dynamics are perhaps the most significant factor influencing the CMBS market in 2025. Over the past few years, central banks, including the Federal Reserve, have raised rates in response to persistent inflation. As inflation pressures ease, the pace of rate hikes is expected to slow, with the possibility of stabilizing or slightly declining rates by mid-2025. However, any deviation from this path, whether due to global economic conditions or unexpected inflationary trends, could influence CMBS spreads and pricing.

For CMBS issuers, higher interest rates typically result in higher borrowing costs, potentially dampening new issuance volumes. However, lower inflation and a stable rate environment would create a more favorable climate for new originations, refinancing activity, and investor demand. With yields on other fixed-income assets potentially flattening, CMBS may stand out as an attractive alternative in the second half of 2025.

  1. Property Sector Divergence

The performance of different property types in the commercial real estate (CRE) market continues to diverge, directly affecting CMBS tied to these assets. Sectors like industrial and multifamily have generally performed well in recent years, benefiting from strong demand and favorable supply-demand dynamics. In contrast, retail and office properties have faced significant headwinds, particularly with the ongoing evolution of e-commerce and hybrid work models.

  • Industrial: Strong demand for logistics and warehousing space, driven by e-commerce and supply chain reconfiguration, will likely keep industrial CMBS in strong demand. This sector’s continued outperformance in rent growth and low vacancy rates provide a solid foundation for stable returns.
  • Multifamily: Multifamily assets remain a popular target for CMBS deals, particularly in urban areas with high population growth and housing demand. However, affordability concerns and regulatory measures (like rent control policies) could introduce risk for specific markets. Nevertheless, steady occupancy rates and rent growth will support stable performance in this sector.
  • Office: The office sector remains the biggest question mark for CMBS in 2025. Many companies have embraced hybrid or fully remote work models, leading to higher vacancy rates and softening demand. There is ongoing uncertainty about the long-term future of office space demand, especially in older, less adaptable buildings. Investors in office CMBS may demand higher yields to compensate for perceived risk, and we may see lower issuance or reduced appetite for office-heavy CMBS portfolios.
  • Retail: While physical retail continues to evolve, certain segments (such as grocery-anchored centers and experiential retail) are performing well. However, non-essential retail remains vulnerable to economic slowdowns, e-commerce competition, and shifting consumer preferences. Retail CMBS deals will likely remain selective, with a focus on stronger assets in prime locations.

  1. Credit Quality and Performance

Credit performance in the CMBS space has been relatively stable, but that could change if the economic environment shifts or if certain property sectors see declining cash flows. Loan delinquencies and defaults have remained low overall but could rise in the office and retail sectors, given their ongoing challenges. CMBS deals backed by properties in secondary or tertiary markets may face additional scrutiny as investors weigh the risks of a potential economic slowdown.

In 2025, underwriting standards are likely to remain tight, with lenders focusing on high-quality assets and borrowers with strong credit profiles. Additionally, issuers may continue to utilize credit enhancements, such as subordination and reserves, to protect against future losses and boost investor confidence.

  1. Regulatory and Environmental Considerations

ESG (Environmental, Social, and Governance) factors have gained increasing prominence in the CMBS market, with investors showing heightened interest in sustainable properties and green bonds. In 2025, CMBS issuers are expected to incorporate more ESG criteria, with an emphasis on energy efficiency, carbon reduction, and climate resiliency. The demand for green CMBS products, which pool loans secured by environmentally friendly properties, could grow substantially as institutional investors seek to align their portfolios with ESG mandates.

On the regulatory front, any changes in banking regulations or commercial real estate tax policies could impact CMBS markets. Additionally, ongoing scrutiny of transparency and risk in structured finance markets may result in more stringent oversight, which could influence issuance and market liquidity.

  1. Investor Demand

Despite some headwinds, CMBS are likely to remain an attractive investment class in 2025. Investors will continue to seek yield in a market where government and corporate bond returns may be less compelling. While certain property sectors, particularly office and retail, present challenges, others like industrial and multifamily offer relative stability. The key for investors will be careful selection and diversification within the CMBS market.

Investor appetite may also benefit from an increase in secondary market liquidity as the market matures and more sophisticated trading platforms become available. Additionally, the growth of synthetic CMBS products may allow investors to gain exposure to specific property types or regions, further diversifying their risk.

A Final Word

The outlook for commercial mortgage-backed securities in 2025 is cautiously optimistic. While challenges persist in certain sectors like office and retail, the market benefits from structural shifts in industrial and multifamily properties. A stable interest rate environment, combined with evolving regulatory and ESG factors, should provide a supportive backdrop for CMBS issuance and investor demand. However, careful attention to credit quality and property sector performance will be essential for navigating the potential risks ahead.