Scope’s expectation is that EUR 5bn of new European CMBS emerge in 2025, thanks to lower rates, the increasing importance of private credit to the CRE sector and better fundamentals for most asset classes.

By CRE sub-sector, we are positive on industrial and logistics, and data centres; cautiously positive on multifamily, hospitality and student housing; neutral for retail and life sciences; and negative for the office sector, which will face continuous headwinds in 2025.

“We expect non-prime offices to suffer from higher vacancy rates than the historically low levels experienced following the global financial crisis as tenants seek prime properties with strong sustainability criteria, flexible space and generally shorter lease terms while tenant incentives remain high,” said Benjamin Bouchet, senior director in Scope’s structured finance team. “Obsolescence risk and capex needs are also mounting for old buildings to mitigate environmental and regulatory risks.”

Revaluations continue to take their toll on loan-to-values, while debt yields continue to deteriorate due to the double whammy of lower occupancy rates and higher non-recoverable costs in most transactions. Across the CRE spectrum, refinancing risk for existing securitised loans will remain elevated in 2025. Scope expects 60% of loans by number will face high or very high refinancing risk, with borrowers facing the dual challenges of tougher competition for less and more expensive bank debt as well as lower asset values.

“These loans have LTVs that are considered too high in the current lending environment combined with persistent high structural vacancies and relatively low debt yields,” Bouchet said. “Most have already benefited from one-year one-off servicer extensions and will need to be modified and require concessions from sponsors such as equity injections in order to extend further.”

The proportion of securitised CRE loans extended or modified at maturity is higher than Scope’s January 2024 expectations. Initial expectations were that eight CRE loans, or 40%, would face higher or very high refinancing risk but 13, equivalent to 62%, did not repay on the expected date.

On the plus side, Bouchet pointed out that there were no defaults at maturity, and the three defaulted loans of 2024 were either corrected (the senior loan of River Green Finance 2020 DAC, and the Everest loan of Emerald Italy 2019 SRL) or recovery proceeds are being allocated to noteholders (the Maroon loan of Elizabeth 2018-1), albeit with a loss for all noteholders. Thus the current year is starting with a clean slate.

Also, most loans have shown an improvement in one or both of debt yield or loan-to-value compared to December 2023: 22 loans (47%) show improvements on both key metrics and 15 (32%) on at least one. Of the 10 loans (19%) where both metrics deteriorated, six are secured by office properties, three by retail properties and one by industrial properties.

Download the European CRE loan and CMBS Outlook here.