The rating agency Fitch is giving commercial mortgage real estate investment trusts (REITs) a neutral rating going into 2025, and offers a glimpse into an improving, but still troubled, corner of the commercial real estate industry.
According to Fitch, most commercial mortgage REITs will see “peak levels of problem loans related to the commercial real estate cycle in early-to-mid 2025, as the path to lower policy interest rates has become clearer.”
Lower rates are expected to reduce the burden for borrowers, provide stability for commercial values and slow ongoing credit quality deterioration. Fitch expects that the primary strategic focus for most commercial mortgage REITs in 2025 will be asset resolution, which should generate liquidity and restart lending.
The resolution process will include foreclosures, which increased significantly in 2024. The largest commercial mortgage REITs now hold on their balance sheets more than $3 billion worth of property that are related to problem loans. That is more than double the amount held in 2023. These properties will either be disposed of by the lenders, or held and operated until their values stabilize or increase. Fitch reports that the 10 largest commercial REITs had gross writeoffs totaling nearly $800 million between the third quarter of 2023 and the third quarter of 2024.
As asset resolutions continue, realized losses are expected to weaken cash earnings coverage of dividends into 2025. Several industry REITs began cutting their dividends in 2023 to align with lowered expectations. Fitch expects more dividend cuts to come. There is also the problem of about $5 billion in aggregate unsecured and secured debt coming due in 2026. Most of this debt was issued at historically low rates and refinancing at higher rates could pressure spread revenue.
Fitch expects loan originations to pick up in 2025 as rates trend downward. Ladder Capital Finance Corporation and Starwood Property Trust were highlighted as two companies that are more diversified and are lower levered than many of their peers, which should allow them to take advantage of opportunities in 2025.
