Borrowers Face Market Uncertainty Despite Spreads Normalizing

“In today’s CRE debt markets, resilience is key. Rising construction costs and tariff pressures are challenging new development, yet we see an opportunity to continue supporting sustainability through strategic financing of existing assets. With spreads normalizing and balance sheet lenders re-engaging, the path forward lies in aligning long-term value with environmental responsibility. At CounterpointeSRE, we’re committed to navigating this evolving landscape with clarity and purpose to empower our clients and partners to thrive.”

-Eric Alini, CEO, CounterpointeSRE

Key Trends to Watch

Negatives: Amid a capital market landscape characterized by volatility and ambiguity, borrowers are exercising caution. Those with the flexibility to delay decisions are opting to remain on the sidelines. New construction starts face headwinds from high financing costs and increased input expenses partly attributed to tariffs (discussed below). These factors collectively are contributing to a softening of demand for construction loans. While acquisition financing is projected to experience year-over-year growth, the acceleration rate is tapering as unfolding economic data continues to influence the market. The deceleration underscores the importance of strategic planning and adaptability for borrowers navigating an economy in transition.

Positives: Despite volatility, debt costs are comparable to pricing at the start of the year. The increase in spreads for conduit CMBS loans remain elevated by only 8 basis points on AAA rated tranches. The compression suggests a more favorable environment for borrowers after the tariff shock as lending conditions continue to normalize. The narrowing spreads indicate increased investor confidence, a stabilizing outlook and greater clarity over the current administration’s economic agenda.

Tariffs Tighten Construction Outlook—But May Bolster Existing CRE Credit

Negatives: Tariffs on foreign lumber, steel, and aluminum will likely lead to higher construction costs. The trend is most evident in homebuilding starts, where the National Association of Home Builders anticipates higher construction costs adding to the existing affordability crisis. Recent estimates suggest that tariffs could add over $9,000 to the cost of building a typical single-family home. For commercial real estate, it’s unclear to what extent the tariffs will impact construction starts, but demand for construction loans is expected to soften.

Positives: While these headwinds are likely to slow new construction starts, the resulting moderation in supply growth could have a stabilizing effect on commercial real estate fundamentals. For existing CRE loans, reduced supply from new developments may support occupancy rates and rental income, potentially enhancing borrower credit profiles.

Refinancing Landscape Changes Amid CMBS Spread Widening

Negatives: In April, the CRE refinancing landscape experienced a slowdown, primarily due to widening spreads in the CMBS market. This shift prompted borrowers to seek alternative financing avenues that offered greater execution certainty and pricing transparency. Balance sheet lenders, particularly large banks, have capitalized on the opportunity to reengage in CRE lending after a period of post-pandemic under-allocation.

Positives: Data indicates a resurgence in bank participation within the CRE lending space since last year. CBRE reports that banks accounted for 43% of non-agency loan closings in Q4 2024, up from 18% in Q3 2024, signaling a robust return to the market. This uptick aligns with broader industry trends, as institutions like JPMorgan Chase anticipate increased balance sheet lending in 2025, which would mark a strategic pivot back into the sector.

Despite the recent slowdown, the forward-looking pipeline for refinancing remains strong. With a substantial volume of commercial mortgage maturities on the horizon, lenders are poised to meet the anticipated demand if market conditions continue to stabilize. The temporary nature of April’s deceleration suggests a market in transition, adjusting to evolving dynamics while preparing for sustained activity in the near term.

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