Commercial Real Estate's Turnaround: A Confluence of Lending Momentum and Spreads Signals Strategic Opportunity

The commercial real estate (CRE) sector in 2025 is at a pivotal inflection point. After years of volatility, a confluence of factors—stabilizing interest rates, resilient lending activity, and narrowing credit spreads—suggests the market is nearing a sustainable recovery. For investors, this presents a compelling case to re-engage with CRE, particularly in sectors such as multifamily and industrial, while exercising caution in office markets. Let us dissect the evidence.

Lending Momentum: A Catalyst for Recovery

The CBRE Lending Momentum Index surged 13% quarter-over-quarter and 90% year-over-year in early 2025, driven by a revival in financing volumes and non-bank lender participation. Traditional banks, constrained by regulatory pressures and risk aversion, have ceded ground to life insurance companies, debt funds, and fintech platforms. These non-bank players now account for 33% of non-agency loan closings, offering flexible terms such as higher loan-to-value (LTV) ratios and asset-level underwriting.

Property-specific trends underscore this recovery. Multifamily transactions, for instance, saw median deal sizes rise 6.3% year-over-year, while industrial and retail sectors also reported increased capital deployment. Even the beleaguered office market is showing signs of stabilization, with transaction sizes growing 25% YoY, albeit at volumes below pre-pandemic levels.

CMBS Spreads: A Barometer of Investor Confidence

The narrowing of commercial mortgage-backed securities (CMBS) spreads reflects a material shift in investor sentiment. Conduit AAA spreads, which hit 110 basis points in April 讶 2025 following trade policy uncertainty, have since tightened to 85 basis points—a 20-basis-point decline from peak levels. Meanwhile, BBB- spreads have retraced 125 basis points since early 2025, signaling reduced risk aversion among institutional buyers.

This tightening is not uniform across asset classes. Multifamily and industrial properties, which dominate CMBS issuance, benefit from strong cash flows and demographic tailwinds. In contrast, office-backed securities remain under pressure, with spreads widening due to elevated delinquency rates and structural overhangs. However, the overall trend suggests a market recalibration rather than systemic distress.

Risks Lurking in the Office Sector

The office market's challenges cannot be ignored. Delinquency rates for office loans hit a decade-high of 1.57% in late 2024, with $47 billion in non-performing loans. Lenders are employing "extend and pretend" strategies—modifying terms rather than recognizing losses—to delay price discovery. While this has kept charge-off rates low (0.26%), it risks prolonging the adjustment period.

Remote work adoption and shifting tenant preferences remain existential threats. The sector's recovery hinges on office users proving that hybrid work models can sustain demand for high-quality urban spaces. Until then, exposure to Class A office assets in resilient markets like New York or San Francisco may offer safer bets than secondary markets.

The Investment Case: Time to Re-engage Strategically

The evidence points to a market in "reset" mode—a phase where disciplined investors can deploy capital with favorable risk-adjusted returns. Key opportunities include:

1. Multifamily and Industrial Sectors: These asset classes benefit from secular demand drivers (urbanization, e-commerce growth) and strong occupancy metrics. Fannie Mae-backed loans or CMBS tranches backed by these sectors offer yield premiums over Treasuries with reduced prepayment risk.

2. CMBS Debt Instruments: Investors should target AAA-rated bonds, which now yield ~85 basis points over swaps—a compelling spread for low-risk capital. Select BBB- tranches with diversified collateral pools could offer asymmetric upside as spreads compress further.

3. ESG-Linked Loans: Sustainability-linked loans (SLLs) now command green premiums, aligning with regulatory incentives and investor demand for ESG alignment.

Navigating the Risks

While the broader market stabilizes, investors must avoid office-heavy portfolios and overexposure to secondary markets. The 20% of CRE loans maturing in 2025 ($957 billion) also poses refinancing risks, particularly for borrowers with weak cash flows.

Conclusion

The CRE sector's recovery is neither uniform nor unambiguously secure, but the convergence of stabilized lending, narrowing credit spreads, and resilient multifamily demand creates a compelling entry point for long-term investors. While office sector risks demand caution, the broader market's "reset" offers a chance to build positions in assets with structural growth drivers. As always, success will favor those who prioritize data-driven underwriting, sector diversification, and a disciplined approach to risk.

The window to capitalize on this transition is open—but selective execution will be key.