The commercial real estate (CRE) market witnessed a resurgence in liquidity throughout 2024 as lenders reopened funding channels. However, challenges tied to refinancing remain significant, according to Trepp’s year-end report.

Key Insights:

Private-label CMBS issuance surged by an impressive 165% in 2024, jumping from $39.3 billion in 2023 to $104.05 billion. This marks the largest annual increase since 2005. Single-borrower deals led the market, accounting for nearly two-thirds of total issuance. Floating-rate loans dominated, fueled by market expectations that the secured overnight financing rate (SOFR) has peaked and may begin to decline.

Refinancing Drives Momentum

Amid subdued property sales and looming debt maturities, much of the 2024 activity centered on refinancing. Of the 39 conduit deals issued, 28 were tied to five-year mortgages—indicating a shift from the traditional 10-year term as borrowers hesitated to lock in long-term rates at elevated levels. Looking ahead, approximately $96.83 billion in CMBS conduit loans and $1.78 trillion in total commercial mortgage debt are set to mature by the close of 2026, amplifying the demand for refinancing solutions.

Challenges Ahead

While liquidity has returned, high interest rates present a growing hurdle. Loans originated in 2023 and 2024, with interest rates ranging from the mid-6% to mid-7% levels, are increasingly struggling to meet standard debt service coverage ratio (DSCR) benchmarks of 1.25. At a 7.50% rate, nearly 25% of these loans fail to meet DSCR minimums, complicating conventional refinancing efforts. Trepp flagged multifamily loans originated between Q2 2021 and Q2 2022 as particularly at risk.

The Bottom Line:

The resurgence of liquidity reflects improved market sentiment, but higher interest rates and stricter underwriting standards are curbing optimism. Refinancing remains a critical driver, though tighter terms from lenders pose significant challenges for borrowers. For well-capitalized investors, these conditions may create opportunities to capitalize on market inefficiencies and distressed assets.