May 4th, 2025
In 2024, loan growth among the top 100 U.S. banks with the largest commercial property debt portfolios turned slightly negative for the first time since 2011, declining by 1% to $1.71 trillion, according to Trepp Bank Navigator. This contrasts with gains of 7.5% in 2023 and 15.1% in 2022. A broader group of 300 banks saw minimal growth of 0.9%. Despite the overall decline, there was an uptick in lending during the second half of the year, sparking some optimism. Major institutions like JPMorgan Chase, Wells Fargo, and Bank of America held their leading positions but mostly saw their portfolios shrink. However, traditional lending metrics don’t fully capture banks' increased activity in indirect lending, such as warehouse lines and loan-on-loan financing to private lenders. As CMBS lenders faced pricing challenges, banks stepped in to absorb that business and began originating larger loans, indicating renewed confidence. as the risk of being able to sell pieces of debt on their books is lower than it has been. Banks are more selective, favoring established sponsors and avoiding riskier sectors, especially offices in markets like San Francisco and Washington, D.C. Nonperforming loans among the top 40 banks rose 27%, reaching the highest level since 2012, which also contributed to the cautious lending environment.
Costar provided an update on how the mounting trade tensions and shifting tariff policies are creating significant uncertainty in global commerce, causing businesses and consumers to pull back. This volatility is already slowing demand for warehouse space, particularly near ports heavily reliant on Chinese imports. Leasing activity has dropped, and import bookings have collapsed, signaling a sharp decline in U.S.-China trade. Some forecasts suggest a near-term 40% reduction in Chinese imports, worsened by tariff hikes now reaching 245%.
Ports on the U.S. West Coast and others with high Chinese exposure—such as Los Angeles, Long Beach, and Seattle—are expected to be hit hardest. In contrast, supply chains are beginning to realign toward ASEAN countries and Mexico, benefiting logistics hubs in those regions. Meanwhile, China's own trade is shifting away from the U.S. toward other markets, further reducing dependence on American demand. In the U.S., this uncertainty is dampening consumer confidence, which has fallen to levels not seen since the pandemic. Retail and vehicle sales are expected to weaken further through 2025, likely suppressing logistics growth for the rest of the year.
Retail sales in March saw their strongest year-over-year gains since 2022, driven largely by consumer spending across a range of categories. However, as we noted the weakening consumer confidence in the previous paragraph, this jump is likely temporary, fueled by shoppers accelerating purchases ahead of anticipated tariff hikes and boosted by tax refunds. Key categories tied to imports—such as vehicles, building materials, electronics, and sporting goods—led the surge, suggesting consumers were front-loading big-ticket purchases before prices rise. Despite the strong retail data, the broader economic outlook remains shaky, with falling consumer confidence, a softening job market, and recent equity market declines. Not all sectors benefited—furniture sales slipped, likely due to previous overperformance, and gas station sales dropped due to lower fuel prices. It's difficult to believe that March’s numbers are the start of a sustained recovery. Forecasts now suggest retail sales will contract in the second half of 2025, marking the first such decline since the pandemic. While this clouds the outlook for retail real estate, low vacancy rates and limited new development should help keep market conditions relatively stable for now.
Rising labor costs driven by stricter immigration enforcement are becoming a major concern, particularly for property sectors that rely heavily on immigrant labor, such as lodging, health care, and cold storage. Gateway cities are expected to feel the most pressure from these changes, while markets with strong domestic migration trends—especially in the Sun Belt—may be less affected. Beyond the already significant impact of tariffs, increased labor expenses could push construction costs even higher, as immigrant labor comprises a substantial portion of the construction workforce. This could lead to a slowdown in new supply, particularly from 2027 onward, which may ultimately support market fundamentals by offsetting the effects of slower population growth. Property sectors with higher development activity, like senior housing, and those in markets with fewer supply constraints—again, often in the Sun Belt—are likely to fare better under these conditions.
We continue to see the 10Y UST bouncing between 4-4..5% as it closed Friday at 4.3%, after dipping down to 4.12% mid week. We will provide an update on pricing and spreads across products this week.
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