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What’s the Fed watching in CRE?

Market Response

July 11, 2025 | 4 min read

Rich Hill

Global Head of Real Estate Research & Strategy

Summary

The minutes of the Federal Reserve’s June 17-18 meeting were released on Wednesday, July 9, 2025. There were three references related to CRE that we believe support a continued recovery:

The outstanding balance of CRE loans is growing, highlighting continued liquidity in the CRE debt markets
CMBS delinquency rates are rising, but they are a lagging indicator, and delinquency rates for other lender types are lower
CMBS spreads, which are a leading indicator, are tightening

The details

The outstanding balance of CRE loans continues to grow, albeit modestly

What did the Fed say? Financing through capital markets and nonbank lenders was readily accessible for public corporations and large and middle-market private corporations. Issuance of nonfinancial corporate bonds and leveraged loans, which slowed in April, was solid in May and early June, and private credit continued to be broadly available in April and May. Regarding bank credit, commercial and industrial loan growth picked up in April but moderated in May. Commercial real estate (CRE) loan growth was modest in April and May.

Our view: This is consistent with The Mortgage Bankers Association release of its 1Q25 Commercial/Multifamily Mortgage Debt Outstanding Report on June 17, 2025. It showed that commercial and multifamily mortgage debt rose 1% to $4.81 trillion in 1Q25, led by REITs and securitizations, such as Commercial Mortgage-Backed Security (CMBS) as well as Commercial Real Estate Collateralized Loan Obligations (CRE CLOs), signaling strong debt fund activity. Banks—especially large ones—increased lending, while only minor lender types saw declines. Overall, the data points to continued liquidity in CRE debt markets, with attractive yields, conservative structures, and a robust pipeline of refinancing opportunities ahead.

See our complete analysis here: CRE Debt Outstanding is up... and an opportunity

CMBS delinquency rates continue to rise

What did the Fed say? Credit quality remained solid for large-to-midsize firms, municipalities, and most categories of mortgages, but delinquency rates continued to be somewhat elevated in other sectors. The credit performance of corporate bonds and leveraged loans remained stable in May. Delinquency rates on small business loans in March and April stayed above pre-pandemic levels. In the CRE market, CMBS delinquency rates remained elevated in May. Regarding household credit quality, the rate of serious delinquencies on Federal Housing Administration mortgages remained above pre-pandemic levels in April. By contrast, delinquency rates on most other mortgage loan types continued to stay near historical lows.

Our view: The +30-day delinquency rate for all private label CMBS loans was relatively stable in June ‘25 at 6.36%, but it has risen +164bp year-over-year. Office, not surprisingly, has the highest delinquency rate at 10.2% (+271bp YoY). That said, delinquency rates for other lender types are much lower as of 1Q25, with +60-day delinquency rates for life insurance companies at +0.47%, the +90-day delinquency rate for banks & thrifts at +1.28% and the +60-day delinquency rate for Fannie Mae at +0.63% vs +0.46% for Freddie Mac. Importantly, CMBS delinquency rates are a lagging indicator as they peaked two years after CRE prices troughed after the Great Financial Crisis (GFC). We expect the CMBS delinquency rate to continue to rise as it remains well below the post-GFC peaks.

CMBS 2.0 private label delinquency rates

+30 days, January 2023-June 2025

CMBS private label delinquency rates for 30 or more days in graph form

Source: BofA Global Research, Intex, Principal Asset Management. Data as of June 30, 2025.

CMBS yields are stable to tightening

What did the Fed say? In domestic credit markets, borrowing costs for businesses, households, and municipalities mostly edged down but remained elevated. Yields on both corporate bonds and leveraged loans declined modestly. Interest rates on small business loans decreased in May. Yields on higher-rated tranches of commercial mortgage-backed securities (CMBS) were little changed or increased slightly, whereas yields on lower-rated CMBS tranches declined, notably so for non-agency securities. Rates on 30-year fixed-rate conforming residential mortgages were little changed and remained elevated. Interest rates on credit card offers ticked up in March and April, while rates on new auto loans were little changed in May.

Our view: Spreads for 10-year AAA-rated fixed rate bonds currently stand at 85bp as of July 9, 2025, more than -20bp tighter than their recent April ’25 peak and -100bp tighter than their post-COVID wides. At the same time, fixed rate BBB- rated bonds are currently trading at +500bp as of June 9, 2025, which is -125bp tighter than their recent wides and almost -500bp tighter than their post-COVID wides. We believe that the tightening in credit spreads is a better proxy for the health of the credit markets than CMBS delinquency rates.

CMBS 2.0 10yr AAA spreads and BBB-spreads (J +)

Basis points, January 2023-June 2025

CMBS 10yr AAA spreads and BBB spreads in basis points from January 2023 through June 2025 in graph form

Source: BofA Global Research, Principal Asset Management. Data are as of June 30, 2025.

Bottom line

The Fed is obviously keeping an eye on the commercial real estate market. Its minutes reveal, however, that, unlike many recent CRE headlines, the overall market is stabilizing, with growing transaction and refinancing activity, and delinquencies, while elevated, are not necessarily representative of the broader asset class.

CRE debt markets remain liquid: Despite modest growth, the outstanding balance of CRE loans is rising, with capital still accessible, especially via CMBS, CRE CLOs, and REITs. This suggests ongoing refinancing and transaction activity.
CMBS delinquencies are rising, but context matters: CMBS delinquency rates are elevated and will likely continue to climb, especially in office, but these are lagging indicators and not representative of broader CRE lending, where delinquencies are much lower (banks, life insurers, agencies).
CMBS credit spreads are tightening: Despite elevated delinquencies, CMBS credit spreads—especially for AAA and BBB- tranches—have tightened since April 2025, signaling improved investor sentiment and stabilizing market conditions.

Macro views

Real estate

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Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Real estate investment options are subject to risks associated with credit, liquidity, interest rate fluctuation, adverse general and local economic conditions, and decreases in real estate values and occupancy rates.  Commercial real estate (CRE) investments carry several inherent risks, including those related to the economy, interest rates, and tenant behavior. These risks can impact property values, rental income, and overall investment returns. Fixed-income investment options that invest in mortgage securities, such as commercial mortgage-backed securities, are subject to increased risk due to real estate exposure.

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Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

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This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.