REAL ESTATE NEWS

Commercial real estate lending conditions ended 2025 on their firmest footing since the last cycle's peak, as permanent financing, investment volumes and private-label CMBS issuance all accelerated into year-end despite pockets of rising delinquency.

While the bid–ask gap has not fully closed across all sectors and markets, capital is clearly moving back into risk, with lenders modestly easing proceeds, investors ramping up portfolio trades and credit spreads holding tight in the face of macro uncertainty.

Investment Volumes Rebound Across Asset Classes

U.S. commercial real estate investment volume increased 29% year-over-year in Q4 to $171.6 billion, pushing full-year 2025 volume to $499.1 billion, 22% above 2024 levels, according to the latest figures by CBRE.

Single-asset sales rose 10% year-over-year in Q4 to $115.6 billion, while portfolio sales more than doubled to $55.7 billion, driven largely by one major data center portfolio but still up 21% even when data centers are excluded. Entity-level trades remained muted, with volume falling 69% year-over-year to just $0.4 billion in Q4.

Sector performance was broad-based. Multifamily remained the largest sector with $49.5 billion in Q4 investment, up 4.4% year over year, followed by industrial at $33.7 billion, up 1.9%. Office volume climbed 21.4% to $26.0 billion, retail rose 27.9% to $19.7 billion, and hotel volume jumped 43.1% to $8.6 billion, aided by cross-border capital from Canada and Japan.

Data centers surged to $27.2 billion in Q4, more than six times the prior year's level, underscoring the sector's role as a new institutional allocation bucket.

Lending Momentum Index Returns to 2018 Territory

CBRE's Lending Momentum Index, which tracks loans originated or brokered by the firm, rose to 1.2 at year-end, up 0.48 points year-over-year and back in line with 2018 readings. The index move was powered by a 26% year-over-year increase in permanent loan financing in Q4, larger average loan sizes, relatively stable spreads and improved LTV ratios. December registered the highest monthly level of permanent loan financing since 2021, underscoring the strength of the year-end rally.

"We are seeing a bifurcated but increasingly healthy commercial real estate lending market," said James Millon, president and co-head of capital markets, U.S. and Canada, at CBRE. "While we see rising delinquencies and legacy loan sales in the secondary markets, these are being easily absorbed by a deep pool of capital. Directionally, credit spreads continue to tighten, backed by a strong liquidity profile and nearly 100% market participation."

Capital Sources Shift as Private and 'Other' Buyers Step Up

On the equity side, private investors remained the dominant buyers, accounting for $91.7 billion, or 53% of Q4 investment volume, up 18% year-over-year and finishing the quarter as net buyers with acquisitions exceeding dispositions by roughly 10%. Institutional investors contributed $26.6 billion, also up 18% year-over-year, representing 16% of Q4 volume and effectively running flat books with a 1.0 acquisitions-to-dispositions ratio.

REITs and public companies pulled back, with Q4 investment falling 27% year over year to $7.1 billion and their market share shrinking to 4%. Cross-border investors were likewise net sellers, with inbound volume down 37% to $6.4 billion and a dispositions-to-acquisitions ratio of about 1.4.

The most dramatic change came from the "other" category—users, unknown and other investor types—which saw Q4 volume surge 211% to $39.8 billion and its market share more than double to 23%, emerging as an unexpected swing factor in the market's recovery.

Market Leaders and Growth Metros

Among individual markets, Greater New York led 2025 investment with $45.7 billion, followed by Greater Los Angeles at $35.0 billion and the San Francisco Bay Area at $24.6 billion. Raleigh-Durham posted the strongest year-over-year growth in total investment among the top 20 markets at 79.4%, trailed by Seattle at 44.2% and Houston at 37.1%.

Looking by property type, Raleigh-Durham also led industrial investment growth with a 148.7% year-over-year jump, while Indianapolis and Columbus logged triple- and high double-digit industrial growth, respectively.

In multifamily, Minneapolis, Seattle, Chicago and Greater New York all registered year-over-year growth north of 35%, while Jacksonville and Seattle were standouts in retail, with Jacksonville's retail volume up more than 232% year-over-year.

Sarasota Metro, New Orleans and the Bay Area each saw triple-digit gains in hotel investment, highlighting the depth of the rebound in select leisure and gateway submarkets.

Pricing, Returns and the Macro Backdrop

Pricing signals were mixed but broadly constructive. The RCA Commercial Property Price Index edged up 0.2% year-over-year in Q4, with the headline index at 141, still 11% below its 2022 peak but 33% above the prior cycle's 2007 peak. Office values posted a 2.8% year-over-year increase. Still, they remained 22% below their 2022 peak and 13% below 2007 levels, reflecting both the depth of the prior repricing and investors' focus on better-quality assets. Industrial values rose 2.0% year-over-year and now sit 10% above their 2022 peak and 82% above 2007, while multifamily and hotel values were down 1.3% year-over-year and remain 19% and 12% below their 2022 peaks, respectively.

Performance data corroborates the turn. The NCREIF Property Index delivered a 4.8% total return in 2025, up sharply from 0.6% in 2024. Retail led with a 6.8% annualized total return, followed by multifamily at 5.3%, industrial at 4.5% and hotel at 4.0%, while office returned 3.4%, a significant improvement from the negative 7.2% posted in 2024.

In the broader capital markets, the Bank of America/Merrill Lynch U.S. Corporate BBB option-adjusted spread tightened by 1 basis point year-over-year to 101 in Q4 and compressed an additional 7 basis points by late January, even amid policy and growth uncertainty. The 10-year Treasury yield traded in a relatively narrow 4.0%–4.2% band during Q4, with inflation and U.S. debt concerns balanced by softer growth and labor-market data, creating a stable backdrop for CRE credit pricing.

Spreads, Coupons and Underwriting Discipline

Loan pricing was steady to slightly tighter. The average spread on closed commercial mortgage loans remained at 197 basis points over the 10-year Treasury in Q4, while multifamily spreads ticked up by just 1 basis point to 142 basis points for fixed-rate, seven-to-10-year loans at 55%–65% LTV.

Mortgage coupons for loans above $10 million stayed concentrated in a 4.5%–6% band, with 87% of these larger financings falling within that range, essentially unchanged from Q3. For loans of $10 million or less, more than three-quarters of Q4 originations carried coupons between 5.5% and 6.5%, up from 52% in Q3, indicating more uniform pricing for smaller-balance deals as rate volatility eased.

Underwriting metrics show lenders walking a fine line between competitiveness and prudence. Debt service coverage ratios improved to 1.36 in Q4 from 1.35 in Q3 and 1.34 a year earlier. Average loan constants declined from 6.9% in Q3 to 6.8% in Q4, while average mortgage rates fell from 5.8% to 5.6%, reflecting lower borrowing costs and the impact of tighter credit spreads.

Cap rates on underwritten deals held at 6.1% in Q4—unchanged from Q3 but up from 5.9% in Q4 2024—suggesting that underwriting remains calibrated to a higher-rate regime.

Lenders have not abandoned discipline on structure. The share of loans that were partial or full interest-only eased to 78.6% from 80.6% in Q3 and 83.1% a year ago, while the share of full interest-only loans held roughly steady at 44.5% versus 44.6% in Q3 and 43.2% in Q4 2024.

Loan-to-value ratios averaged 63.5% in Q4, up modestly from 63.0% a year ago, with commercial LTVs at 60.9% and multifamily at 66.2%, reflecting slightly higher proceeds but still conservative leverage relative to prior cycles. Debt yields increased by 9 basis points year over year to 9.8%, underscoring that lenders are maintaining a cushion even as they lean into volume.

Alternative Lenders and CMBS Regain Share

The mix of non-agency capital changed meaningfully over the past year. Alternative lenders—primarily debt funds and mortgage REITs—accounted for 40% of non-agency commercial and multifamily loan closings in Q4, up from 23% a year earlier, with debt-fund volume up 112% year-over-year.

Banks held 35% of non-agency loan closings, down from 43% a year ago, but their origination volume grew 73% quarter-over-quarter as they selectively returned to the market. Life companies' share of non-agency volume slipped to 19% from 33%, while CMBS lenders expanded from 1% to 7% of volume, with lending roughly six times higher than the prior year. CBRE noted that private-label CMBS issuance reached $158 billion in 2025, the highest annual total since 2007.

The resurgence of CMBS is particularly important for transitional business plans and secondary-market liquidity, complementing the growth in debt-fund lending and providing additional execution options for borrowers and loan sellers.

Agencies Anchor Multifamily Liquidity

Agency lending remained a critical pillar of multifamily finance. Combined Fannie Mae and Freddie Mac originations reached $55 billion in Q4, up 23% quarter-over-quarter and 4% year-over-year, bringing full-year 2025 agency production to $150 billion—25% higher than in 2024. CBRE's Agency Pricing Index, which tracks average fixed mortgage rates for closed seven-to-10-year permanent loans, declined 18 basis points quarter-over-quarter and 9 basis points year-over-year to 5.3% in Q4, providing attractive all-in coupons for borrowers even as base rates remained elevated by historical standards.

Source: GlobeSt/ALM