Strategic Positioning in a Post-Rate Stabilization Era: The Resurgence of Commercial Mortgage REITs

In the wake of the Federal Reserve's aggressive rate hikes from 2022 to 2023, commercial mortgage REITs (mREITs) faced a perfect storm of declining asset values, rising non-performing loans, and compressed net interest margins. However, as of early 2025, the sector is emerging from this turbulence, with strategic repositioning and a stabilizing interest rate environment fueling a cautious but discernible recovery. This article examines how mREITs are navigating the post-rate stabilization landscape through portfolio adjustments, geographic diversification, and risk mitigation, while positioning themselves for long-term growth.

Portfolio Adjustments: From Contraction to Renewal

The most immediate response to the 2022–2024 crisis was a sharp contraction in mREIT loan portfolios. By mid-2025, the collective loan books of 16 major commercial mREITs had shrunk by 18% compared to their 2022 peaks, totaling $80.6 billion, according to a Trepp analysis. This reduction was driven by a combination of elevated interest rates, which made new lending unattractive, and the need to resolve distressed assets. For instance, TPG Real Estate Finance Trust slashed its high-risk loan balances from $1.24 billion in late 2022 to $216.8 million by mid-2024 through selective sales and foreclosures, as Trepp notes. Similarly, Blackstone Mortgage Trust, the sector's largest player, reduced its loan book by 26% from 2022 levels but has since resumed lending, originating $1.4 billion in loans during the first half of 2025, according to a REIT.com article.

This strategic shift from loan originations to asset management reflects a broader industry trend: mREITs are prioritizing liquidity preservation and risk reduction. As of 2025, the focus has turned to resolving legacy issues, with risk-rated loans in categories 4 and 5 (distressed or near non-performing) exceeding $10 billion across the sector, REIT.com reports. Analysts note that this deleveraging has allowed REITs to redeploy capital into newer, healthier 2024–2025 vintage loans, which are written at tighter spreads and stabilized capital sources, per the Deloitte outlook.

Geographic Diversification: Mitigating Regional Risks

Geographic diversification has emerged as a critical strategy for mREITs seeking to insulate themselves from localized economic downturns. According to Deloitte's 2026 commercial real estate outlook, 65% of industry leaders expect improvements in fundamentals such as rental rates and leasing activity by 2026, but this optimism is tempered by a cautious approach to capital deployment, and J.P. Morgan research highlights similar caveats in industry sentiment, as noted in its Inside REITs piece. To balance risk and reward, many mREITs are expanding beyond the U.S. into markets like India, Germany, and Singapore, where regulatory environments and economic cycles differ from those in North America.

This global expansion is not merely a defensive tactic but also a growth opportunity. J.P. Morgan Research highlights that U.S. REITs may benefit disproportionately from a rate-cutting environment, as lower borrowing costs could spur loan originations and asset revaluations. In a related view, an Invesco insight argues that mREITs with exposure to European markets-where interest rates are expected to lag U.S. cuts-could capitalize on divergent yield curves. By spreading risk across geographies, mREITs are better positioned to navigate macroeconomic volatility while accessing high-quality assets in underpenetrated regions.

Risk Management and Capital Deployment

The post-rate stabilization environment has also forced mREITs to refine their risk management practices. With non-performing loans peaking at 8.3% in early 2025, Deloitte notes that REITs have adopted aggressive strategies to reduce exposure to problem assets. These include selling collateralized properties at near-cost levels, as seen in the case of Apollo Commercial Real Estate Finance, and leveraging partnerships to access alternative capital sources, which REIT.com has reported.

Moreover, mREITs are increasingly prioritizing credit quality in new originations. The 2024–2025 vintage loans, written at spreads significantly higher than pre-2022 levels, reflect a more disciplined approach to underwriting, according to the Deloitte outlook. This shift is supported by improved credit spreads, with the 30-year mortgage rate minus the two-year Treasury rising from 1.70% in early 2023 to 3.0% by mid-2025, per Deloitte's analysis. As a result, mREITs are not only stabilizing book values but also enhancing net interest margins, which are expected to benefit further from anticipated rate cuts in 2026.

Outlook: A Path to Sustainable Growth

The near-term outlook for commercial mREITs is cautiously optimistic. J.P. Morgan projects REIT earnings growth to remain around 3% in 2025, with potential acceleration to nearly 6% in 2026, driven by stable fundamentals and increased investment activity, and a REITLog analysis highlights portfolio diversification as a key strategy. Deloitte's survey of industry leaders also underscores this optimism, with 83% expecting revenue improvements over the next 12–18 months, as J.P. Morgan's Inside REITs piece indicates.

However, challenges remain. Macroeconomic volatility and policy uncertainty could delay the recovery, particularly in sectors like office real estate, which continue to grapple with structural shifts in demand, a risk J.P. Morgan highlights. For mREITs, the key to navigating these headwinds lies in agility-whether through dynamic portfolio adjustments, geographic diversification, or strategic partnerships.

Conclusion

Commercial mortgage REITs are at a pivotal juncture. The sector's ability to shrink risk-weighted portfolios, refinance legacy loans, and diversify geographically has laid the groundwork for a recovery. As interest rates stabilize and the yield curve improves, mREITs that have prioritized liquidity, credit quality, and global exposure are well-positioned to outperform. For investors, the current environment offers an opportunity to capitalize on a sector that, while still healing, is demonstrating resilience and adaptability in the face of unprecedented challenges.