By Beau Jones

The U.S. has entered 2025 on a tide of positive economic momentum, underpinning a commercial real estate (CRE) recovery, while evolving market conditions signal a pivotal year for loan servicing. Amid enduring volatility, a clearer direction over interest rates is improving liquidity and capital flows, leading to a greater reliance on robust asset management capabilities and effective risk management. In this article, we explore five themes that are set to shape the trajectory of U.S. CRE loan servicing this year.

1. Macro tide turning: Easing interest rates and renewed liquidity

In 2024, annual GDP growth surpassed expectations to reach 3.0%, the latest estimates show, as Consumer Price Index (CPI) inflation eased from 4.1% to 2.9% over the year, while the Federal Reserve implemented a combined rate cut of 1%, between September to December, reducing the federal funds target range to 4.25%-4.50% by year-end.

Looking ahead to 2025, the world’s largest economy is forecast to outperform again, underpinning improving CRE demand. Federal Reserve policymakers revised year-end growth upwards to 2.1% (from 2%), citing a rebalancing labor market and the economy’s ability to absorb policy changes. However, stronger-than expected growth has also prompted upward revisions to annual core inflation, from 2.2% to 2.5%, and a slight downward revision to the unemployment rate, from 4.4% to 4.3%.

The economy’s resilience has halved the number of expected rate cuts, from four to two. The Fed’s December “dot plot” now signals 50 basis points of total rate cuts in both 2025 and 2026, compared to 100 bps cuts in both 2025 and 2026 back in September. This revision underscores the strength of the economy while signaling that future monetary policy adjustments will be gradual.

At the CRE Finance Council’s (CREFC) annual January conference in Miami, participants were confident that the peak of the interest rate cycle is behind us – a stark contrast to the uncertainty that stalled decision-making over the prior 18-24 months. Consensus among attendees implied rate cuts for 2025 ranged between 25 and 75 basis points, reinforcing growing optimism for market stability. However, caution remains warranted as familiar headwinds persist, including potential trade disputes, unresolved geopolitical tensions, a persistently large U.S. budget deficit, and the risk of re-accelerating inflation. These factors suggest that while the trajectory for rates is downward, volatility will likely endure throughout the year.

Clarity on inflation and interest rate trends has lifted confidence across U.S. CRE investment, leasing, and financing. The ongoing reduction in borrowing costs is unlocking liquidity, with previously sidelined dry powder beginning to flow into new transactions and refinancing. As market stability improves, a broader range of lenders are becoming active participants, supporting the real estate recovery.

2. From extensions to resolutions: A year of portfolio stabilization

Lenders and loan servicers are approaching legacy portfolio challenges in 2025 with renewed confidence and clarity. Unlike the previous years, when uncertainty around inflation and limited liquidity stalled decision-making, the current environment offers a more favorable backdrop. Over the past 18 months, critical risks have abated: recession fears have eased, restrictive interest rates have softened, and the once-inverted yield curve has normalized. These developments set the stage for a more proactive and decisive approach to asset management.

In troubled sectors like legacy office spaces (particularly Class B and below), the dynamics are shifting. Hybrid work trends that led to an increase in vacancies are starting to reverse, with many companies implementing stricter in-person work mandates. This trend, combined with more repurposing of legacy office stock for residential use, is expected to drive gradual absorption of vacant space. Improved valuation clarity is further empowering lenders and servicers to transition from short-term extensions to permanent solutions, including more asset sales, foreclosures, and comprehensive loan restructurings.

Well-capitalized sponsors and assets with strong fundamentals are likely to benefit from renegotiated loan terms that support sustainability goals. By contrast, underperforming assets that benefited from short-term extensions last year face a higher risk of foreclosure or sale, as servicers capitalize on improving conditions to resolve legacy transactions.

3. The office market approaches an inflection point

The U.S. office market is showing early signs of stabilization as improving demand for top-tier assets intersects with a waning influence of hybrid work. According to Cushman & Wakefield (C&W), Q4 2024 was the most stable quarter for U.S. office demand in over two years, marked by favorable shifts in vacancy rates, net absorption, sublease availability, and construction pipelines.

The outlook for office performance is increasingly fragmented by asset quality. Demand for top-tier properties remains strong, with investors and asset managers confident enough to invest capital expenditures into assets just below Grade A to capture rising tenant interest. Vacancy rates are beginning to stabilize, with 42 of the 93 U.S. office markets reporting flat or declining quarter-over-quarter (QOQ) vacancy and 44 markets showing positive net absorption, according to C&W data. Sublease availability, a leading recovery indicator, declined for the third consecutive quarter, falling 2.6% QOQ to 142.2 million square feet (msf)– a 3.8% drop from its Q1 2024 peak. Meanwhile, the construction pipeline shrank to 29.3 msf by year-end, the lowest level since 2011 and half the size of a year ago. This slowdown in new supply reduces oversupply risks and supports rental growth prospects for Class A properties, which remain in high demand.

The flight to top-tier office properties is accelerating as occupiers are looking for premium, upgraded workspaces over aging Class B stock. Corporate America’s push for in-person work – typically three or four days per week – has driven demand for Class A properties, supported by generous improvement allowances and competitive lease terms. Federal mandates, such as the Trump administration’s executive order requiring federal employees to return to the office five days a week, has emboldened corporations to implement similar policies.

Despite these positive trends, challenges persist. Elevated vacancy rates and uneven recovery across markets continue to weigh on the sector. Class B properties still face steep challenges, with many being repurposed for alternative uses such as residential conversions. At CREFC’s annual January conference, 76% of the audience identified the office sector as the most worrisome for 2025. However, attendees noted that issuers now have more leverage in structuring office loans, including setting conservative leverage levels, mandatory equity contributions, and additional credit enhancements.

Encouragingly, lenders, servicers, and sponsors are confident the market can absorb the anticipated wave of office loan maturities in 2025. Office loans are increasingly seen as an opportunistic play, though they remain a challenge to originate, as assets require reset to current market values and conservatively underwritten. Notably, note sales of office loans are receiving multiple bids, demonstrating appetite for the property type at appropriate yields, CREFC attendees heard in January.

4. Data centers to take center-stage in U.S. capital markets

U.S. data centers are poised to play a central role in capital markets activity in 2025, fueled by the rapid expansion of digital infrastructure driven by artificial intelligence (AI), cloud computing, and 5G. Hyperscalers and enterprises are driving large-scale development as the need for robust processing, storage, and computing capacity grows. According to CBRE, 100+ megawatt (MW) projects will become the standard in 2025, reflecting the increasing scale of investments in digital infrastructure.

Two high-profile projects illustrate this trend. The first is the Stargate Project, a joint venture between SoftBank, OpenAI, Oracle, and MGX, which plans to invest up to USD 500 billion over four years to build 20 AI-focused data centers. Similarly, Damac Properties, a UAE real estate developer, announced USD 20 billion in investment to construct data centers for AI and cloud computing across eight states. Recent news that Chinese start-up DeepSeek’s AI Assistant has demonstrated competitiveness with U.S. competitors at a fraction of the price, has raised questions over hyperscalers’ capital expenditure. But this fear is likely an over-reaction. Indeed, the Stargate Project suggests more, not less, investment in AI is required in the years ahead.

Tenant retention remains exceptionally high, driven by their significant investment in computing and server infrastructure – costs that often exceed three times the cost of the building itself. These dynamics strengthens the appeal of data center assets, attracting institutional capital and private equity interest, as well as robust lending appetite.

At the January CREFC conference in Miami, panelists noted that U.S. data centers projected financing needs are estimated at USD 500 billion over the next five years. Financing is traditionally securitized through CMBS/ABS transactions, with deals regularly oversubscribed by two–three times. These dynamics may push opportunistic investors towards participation in club financing deals as they seek sector exposure to the high-growth sector. However, despite abundant capital flows and strong leasing demand, transaction volumes are expected to increase only modestly in 2025 due to significant bid-ask spreads and a limited supply of available product, according to JLL. Challenges also remain, particularly related to power shortages, which continue to delay construction timelines in high-demand regions. To address these limitations, developers are exploring innovative energy solutions aligned with sustainability goals and renewable energy sources.

CMBS and ABS: New issuance resurgence

Capital markets are poised for a surge in CMBS and ABS issuances in 2025, as declining interest rates and stabilizing valuations spur sponsor demand and creditor appetite. New issuance will be fueled by borrowers refinancing requirements, comfort with prevailing valuations, as well as the prospect of reduced regulation improving the economics of securitizations.

Issuance is forecast to reach levels not seen since the global financial crisis (GFC), with conduit and single-borrower CMBS projected to dominate the pipeline. CRE collateralized loan obligations (CLOs) are also expected to stage a strong comeback, supported by widening bridge lending capacity, predicts ratings agency KBRA. However, credit challenges on outstanding CMBS will persist as delinquency and special servicing rates climb. Fitch Ratings expects a slower climb in overall U.S. CMBS delinquencies in 2025, as refinancing improves, issuance volumes grow, and loan modifications temper upward pressure on defaults.

The outlook remains fragmented across asset classes. Maturity defaults are expected to remain high in underperforming sectors like Class B/C offices and lower-tier malls, where elevated interest rates and low liquidity erode performance fundamentals. While interest rates are expected to fall in 2025, sticky inflation, trade policy uncertainties, and geopolitical risks may slow the pace of rate cuts and temper refinancing activity.

In 2024, loan modifications largely focused on providing extended timelines for workouts. In 2025, however, the market is expected to pivot toward resolutions, with fewer “extend-and-pretend” strategies and a greater emphasis on achieving consensus-driven outcomes through special servicing. Maturity defaults will likely remain a challenge but will increasingly lead to decisive resolutions, such as sales, foreclosures, or restructurings.

Attendees at CREFC’s January conference highlighted single-asset single-borrower (SASB) securitizations and CRE CLOs as bright spots, reflecting borrowers’ demand for flexibility and investors’ preference for straightforward financing structures. SASB transactions are expected to dominate issuance, while CRE CLOs will benefit from greater confidence as valuations reset and liquidity flows back into transitional assets.

Issuers are also responding to market demands for enhanced structures and asset management practices. The CMBS 4.0 initiative and improved investor reporting frameworks are designed to ensure CMBS remains a competitive and reliable financing tool. These efforts aim to balance the needs of sponsors with the expectations of investors, fostering transparency and confidence in the market.

Conclusion

Recovering real estate fundamentals and greater clarity on interest rates have created an opportunity for servicers and sponsors to resolve legacy transactions favorably. Lenders and servicers are well-positioned to address distressed assets through foreclosures, consensual sales, and long-term restructurings in the first half of the year, as valuations continue to stabilize and liquidity improves.

At the same time, appetite for new vintage transactions is set to rise, with SASB issuance anchored to high-performing alternative sectors such as data centers, alongside a resurgence in CRE CLOs. These structures will enable investors to capitalize on renewed demand for transitional assets, particularly those backed by well-capitalized sponsors with clear, executable business plans. The shift from defensive extensions to proactive resolutions and selective new issuance signals a market steadily regaining stability, positioning investors for a productive year ahead – one defined by recovery, renewed capital flows, and growth.

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Beau Jones, Executive Managing Director of Global Business Development at Trimont, has more than 25 years of commercial real estate finance experience with substantial CRE underwriting and asset management expertise. His experience includes both domestic and international investments of all major property types, including equity and debt underwriting and asset management, as well as primary and special servicing for Fannie Mae, Freddie Mac, balance sheet, CMBS, construction and interim debt products.

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