According to the latest analysis from MSCI, the commercial real estate (CRE) market in 2025 remains under pressure as underwater loans and distressed assets present significant challenges.

Loans at Risk

Among the $500 billion in CRE loans set to mature this year, 14% are classified as underwater, where the outstanding loan balance exceeds the asset’s current market value. Multifamily and office properties are particularly vulnerable.

Key Figures

Nearly $19 billion of maturing multifamily loans in 2025 are underwater, largely stemming from acquisitions made at peak prices during the 2020-2022 boom. Office properties face even greater struggles, with 30% of maturing loans, amounting to $30 billion, exceeding current valuations.

Sector-Specific Challenges

Structural issues continue to weigh on certain asset classes, Alexis Maltin explains:

Industrial: Older properties, especially those built before 2010, face obsolescence and functional limitations.

Retail: Larger shopping malls are struggling, accounting for 80% of underwater retail loans linked to these underperforming assets.

Multifamily: While these assets are structurally sound, inflated valuations during the recent real estate surge have left some investors exposed.

Emerging Opportunities

Despite the challenges, there are signs of improvement in certain areas. Investor interest in office properties is rising, particularly in central business districts (CBDs), where price adjustments spurred an uptick in sales activity during Q4 2024. MSCI also noted a decline in overall distress levels across the CRE market in the last quarter. However, issues related to delinquent and foreclosed loans remain distinct from underwater debt.

The Bottom Line

While distress in the CRE market has eased slightly, the high volume of underwater loans highlights ongoing struggles in 2025. Investors are finding value in discounted properties with reliable tenant profiles, but refinancing hurdles, especially in the office and retail sectors, will continue to test the market’s resilience.