Optimism for continued commercial real estate loan growth in 2026 - by Alan Doyle and Jeff Miller

 

 

Brief Recap – In a brief recap, 2024 saw a welcomed surge in commercial real estate (CRE) lending, which grew by $498 billion (16%) over the prior year. Given its continued popularity it’s no surprise that multifamily lending accounted for 65% of this increase. This growth in originations, especially after a disappointing 2023, (see chart) was triggered by a combination of modest reductions in interest rates, improved investor optimism and increased demand for multifamily and government-backed agency loans.

Per a recent Mortgage Bankers Association publication, outstanding CRE debt in the U.S. totaled $4.75 trillion at end of Q3 2024. Of this, commercial banks held the bulk of this at 38%, followed by agencies (Fannie/Freddie/FHA) at 22%, life insurance companies at 16% and CMBS lenders at 13%. Private institutional and non-institutional funds accounted for the balance.

Current Lender Appetite
Lending activity in 2025 remains brisk, with many financial institutions already having met or exceeded their annual origination goals by the end of the third quarter this year. What precipitated this increased loan volume was a combination of a modest decline in long- and short-term rates, shrinking lender spreads and more aggressive loan underwriting.

The most sought after CRE sector, stabilized multi-family, continues to attract the best pricing, which for banks is as aggressive as 190 bps above SOFR (6.08% today), and life companies, 145 bps over treasuries (5.5% today) for 10-year fixed rate financing and Fannie/Freddie at 180 bps (5.75% today).

Concern Over  Rising Office Delinquencies
Per a recent Trepp report, overall CRE loan delinquencies for the third consecutive quarter this year remained relatively flat at 1.94%. However, this “average” is a blend of weighted delinquency rates across all CRE sectors and therefore wide variations exist in rates by property types. For example, while multifamily delinquency rates currently hover at 1.4%, office delinquency rates increased to 8.12% by Q3 2025. For example, recent high-visibility office delinquencies include:

• Blackstone – $308 million on 1740 Bdwy., NYC.

• Tamares Group – $335 million on 1500 Bdwy., NYC (Good Morning America studios).

• Paradigm Properties – $79 million on CityPlace I, Hartford.

Therefore, it comes as no surprise that loans on older or underperforming office properties will continue to be problematic for lenders for the next few years, requiring loan restructuring or in some cases, a discounted sale of the note or foreclosed assets.

Brighter Economic News Ahead
The Congressional Budget Office (CBO) is the key nonpartisan score keeper that measures the effects of policy changes by the federal government. Since January 2025, these changes include the One Big Beautiful Bill Act (OBBBA), stricter immigration, and higher tariffs. Therefore, the CBO recently updated its economic projections through 2028, which reflected lower GDP growth in 2025, due to negative effects of tariffs, but improved growth from 2026 – 2028 as supply chains adjust to tariffs and the OBBBA boosts consumption and private investment.

2026 CRE Financing Outlook
CRE loan originations are clearly showing renewed momentum. With an estimated $957 billion in CRE mortgages maturing in 2026, refinancing and new capital opportunities are expected to be key drivers of market activity. For those older loans originated between 2020 – 2021 (see chart), which carry interest rates significantly below the current market, the challenge will be to refinance these loans without having to backfill potential LTV gaps with equity capital.

At the Fed’s September policy meeting, a narrow majority of votes indicated that the Fed intends to reduce short-term rates at least two more times before the end of 2025 to offset a slowing economy, rising unemployment and deteriorating consumer confidence. We believe that the bond market will also experience some easing such that the 10-year treasury may fall and remain below 4% for much of 2026. This would support continued growth in CRE lending despite continuing domestic uncertainty and geopolitical headwinds in 2026.

Because of this evolving rate and credit landscape, experience matters in selecting a trusted advisor to provide the full market breadth of financing options (banks, insurance companies, private capital, CMBS, agencies) and assist in the selection of that option which best fits a client’s risk tolerances and investment objectives.

Alan Doyle is a principal and Jeff Miller is a senior vice president with Larew Doyle & Associates, Inc.