Commercial Real Estate Refinancing Challenges

August 19, 2025 | Author:  David J. Murphy

The U.S. commercial real estate sector faces significant refinancing challenges with approximately $2 trillion in mortgage debt maturing between 2024 and 2026, according to the Mortgage Bankers Association.

The Refinancing Environment

The Federal Reserve maintained the federal funds rate at 4.25-4.50% following its July 30, 2025 meeting, where the FOMC voted 9-2 to keep rates unchanged. This is the fifth consecutive meeting without adjustment. Current commercial mortgage rates of 6.5-7.0% represent a significant increase from the 3.0-4.0% levels at which many loans originated during 2020-2021, based on Federal Reserve H.15 data.

Property valuations have adjusted downward across all sectors. According to MSCI data reported by the Mortgage Bankers Association, average declines from 2022 peaks show offices down 23% and residential buildings down 20%. Industrial properties have experienced more modest declines of 10-15%, while multifamily properties have fallen 15-20% from peak valuations according to CBRE research. These declines, while significant, have begun to stabilize, with PIMCO reporting that Class A buildings have likely bottomed out, with some selling below replacement cost.

Current lending standards require loan-to-value ratios of approximately 65%, compared to 80% common during the 2020-2021 period. Banks, which hold 38% of the $4.7 trillion in total commercial real estate debt, have pulled back significantly, with overall commercial real estate lending down 58% from pre-pandemic averages according to Federal Reserve data.

The Market Has Adapted

The market has adapted despite constraints. According to Mortgage Bankers Association Q2 2025 data, refinancing activity comprises 72% of year-to-date loan originations, the highest share since 2000, indicating that the majority of maturing loans are finding refinancing solutions despite challenging conditions. Commercial and multifamily mortgage loan originations increased 66% year-over-year in Q2 2025 and were up 48% from Q1 2025, indicating improving momentum.

The pattern of loan extensions suggests relief and evidence of stress. CBRE research indicates that many of the $700 billion in loans that came due in 2024 were extended, increasing the total coming due in 2025 by $271 billion. Similarly, many 2024 maturities are expected to be extended to 2025 and beyond. This “extend and pretend” strategy, while delaying resolution, prevents forced sales at distressed prices.

According to Federal Reserve officials and market analysts, lenders are now more demanding than in previous cycles. Extensions come with conditions including partial pay-downs of principal, additional collateral requirements, and stricter operating covenants. As one market report noted, banks now “force borrowers to fork over cash or agree to stricter loan covenants” rather than providing free extensions.

Actual Distress Levels

Current distress indicators suggest elevated but manageable stress levels. The CMBS special servicing rate has reached 8.2% according to Trepp data from August 2025, representing the highest level since June 2021. CRE CLO delinquency rates have increased to 7% from less than 1% before the pandemic, according to PIMCO research. While these metrics indicate stress, they remain below crisis levels.

The concentration of distress in specific property types provides important context. Office sector bank lending is down 65% compared to pre-pandemic averages, reflecting particular challenges in this sector. The national office vacancy rate climbed to 20.4% in Q1 2025, a record high according to Moody’s data cited by J.P. Morgan. However, even within office, the market remains bifurcated, with prime properties showing resilience while Class B and C properties face severe challenges.

Probable Outcomes by Property Type

The refinancing challenge varies significantly by sector based on fundamental performance documented in market reports. Industrial properties continue to benefit from e-commerce growth, with CBRE describing industrial as “the industry’s darling” driven by logistics demands. Despite some near-term uncertainty causing delays in leasing decisions, the sector’s fundamental strength positions it well for refinancing.

Multifamily properties show continued resilience according to J.P. Morgan research, with performance described as “strong” despite ongoing economic uncertainty. After a surge in completions over the past two years, vacancy is expected to edge down in 2025 due to robust tenant demand. The permanent extension of Low-Income Housing Tax Credit expansions, which could help fund millions of affordable homes according to J.P. Morgan’s analysis, provides additional support for affordable housing refinancing.

Office properties face the most significant challenges, with wide variation based on quality. PIMCO research indicates that while Class A buildings have likely bottomed out with some selling below replacement cost, Class B and C properties, particularly in office and life sciences, still have room to decline. Some markets show recovery signs, with reports noting that “New York’s Midtown has largely returned to pre-pandemic rent levels” while “San Francisco has started to turn around but is still early in its recovery.”

Conclusion

The $2 trillion refinancing challenges are manageable for commercial real estate markets. While the Federal Reserve rates at 4.25-4.50% and property value declines of 15-23% creates substantial refinancing friction, current evidence suggests gradual resolution rather than crisis.

David J. Murphy is the managing attorney of the law firm of Murphy PC in Boston, Massachusetts.  He regularly represents real estate developers and investors in real estate development projects.