"No-one wants to sell anything"
Commercial real estate (CRE) delinquencies are rising. According to one industry expert, the potential for delinquencies in the lodging and warehouse sectors will become a massive problem.
Industry sentiment is slumping. The latest CRE Finance Council (CREFC) Board of Governors Sentiment Index saw a 30.5% decline in the first quarter of 2025 from the fourth quarter of 2024. This was the largest drop since the start of the COVID-19 pandemic. The index value of 87.9 is the first time it’s been below 100 since the pandemic.
Delinquencies are also on the rise. According to the latest Trepp commercial mortgage-backed securities report, the CMBS delinquency rate rose 38 basis points to 7.03% in April. The overall rate surged above 7% for the first time since January 2021. Multifamily and lodging delinquencies contributed to the increase.
Nathan Cohen (pictured top), head of the CRE division at LBC Capital Income Fund, said the commercial market is on the verge of a serious delinquency problem.
“I think the issue of delinquencies is smoldering,” Cohen told Mortgage Professional America. “I think it’s going to be a massive problem. There’s some compression on values. I do a lot of multifamily loans. Years ago, 15 times gross on an apartment building was a pretty fair valuation. Good areas even hit 18 times gross, and nobody would question that.
“Now, even though rents have gone up substantially, now we’re looking at 10 times gross.”
Because of the affordability issues in the commercial real estate market, and the expectations of buyers, Cohen said the market is at a stalemate.
“No-one wants to sell anything because their argument is they can’t find a replacement property,” Cohen said. “Borrowers are just not realistic or willing to accept what’s available in the current marketplace.”
Banks don’t want to get rid of bad loans
Because of the current market conditions, banks are hanging on to loans, even if they aren’t good loans.
“There’s no urgency on the lender side to clear these off the books,” Cohen said.
“Most of these loans have 30 different things that can cause you to be in default, and only one of them is not paying your loan payment.”
One reason Cohen speculates could motivate banks to hold on to these loans is that they would likely not be able to replace the loan debt.
“If the banks buckled down and said, ‘we’ve got to get all these bad loans off our books,’ their loan balance is going to go to like nothing,” Cohen said. “They’re going to have to originate new loans, which they’re not going to be able to do in the current lending environment.”
Tariff impacts will worsen delinquency situation
As tariffs’ impact continues to increase, especially tariffs on China which are causing imports to grind to a halt, the effects will be felt in the commercial real estate market.
“Industrial and multifamily are the two safest commercial loan types,” Cohen said. “Multifamily is going to be pretty safe because Bob and Mary don’t want to get evicted from their apartment, so they’re going to pay rent, and the landlord is going to be able to make his mortgage payment. On the industrial side, how much of this industrial boom was based on modern bulk, million square foot warehouses filled with hair dryers from Amazon?
“That’s now going to stop. So what’s going to happen when we have these mega warehouses empty and not being able to pay their mortgage. That’s going to be a real thing.”
Cohen believes the general public will begin to notice when they see warehouses and hotels begin to close due to mortgage delinquencies.
“I think it starts to get people’s attention when the hotel has to close down,” Cohen said. “And 40 workers there can’t go to work. When working people can’t go to the building they worked at anymore, I think that’s when it’s going to get ugly. Or who knows? Maybe they’ll just kick the can down the road and just do some more forbearances.”
If delinquencies surge, Cohen wonders if big corporations will buy up properties similar to what happened to rental homes.
“Some of these big institutions will go to these bigger banks and buy big loan tapes that are in default, and just foreclose on them,” Cohen said. “They’ll wind up landlords, like with the rental house market. I’ve talked to people who bought a home in a neighborhood. They worked hard and wanted to do the American dream of buying a house.
“Now they live in a tract subdivision with 200 homes, and 180 are rental properties. Now you essentially live in an apartment complex where nobody cares.”
Cohen stressed that even in this challenging market, loan deals can be made as long as all parties involved have realistic expectations.
Alex Horn of BridgeInvest sees opportunity in class A and B office properties despite a tough commercial real estate climate. He points to tenant demand for collaboration-ready, amenity-rich spaces as a key rebound driver in 2025.https://t.co/gcIeCg1oNT
— Mortgage Professional America Magazine (@MPAMagazineUS) May 1, 2025
“If you own a property and your loan is matured, you know you can probably get it refinanced,” Cohen said. “The likelihood of doing a cash-out refinance is very small. If you’re doing a cash-neutral deal, you should consider yourself lucky, and you should take the deal and close the loan.
“Don’t spend time hoping that you’re going to improve on it by 25 basis points, because you’re going to wind up with nothing in your building, foreclosed on.”
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