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What’s the Fed watching in CRE? (September Minutes Update)

Market Response  

October 10, 2025 | 3 min read
Rich Hill
Global Head of Real Estate Research & Strategy
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What’s the Fed watching on CRE (October Edition)

The minutes of the Federal Reserve’s September 16-17 meeting were released on Wednesday, October 8, 2025. While there were no mentions related to CRE in the last (July) Fed minutes, there were three references this time:

  1. The outstanding balance of CRE loans is growing, highlighting continued liquidity in the CRE debt markets.
  2. CMBS delinquency rates are rising, but they are a lagging indicator, and delinquency rates for other lender types are lower
  3. CMBS spreads, which are a leading indicator, are tightening, while CMBS issuance is set to reach its highest annual level since 2007.

The details

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

What did the Fed say? Financing from capital markets remained broadly available for medium-sized and large businesses. Gross issuance of nonfinancial corporate bonds across credit categories continued at a strong pace in July and August, and leveraged loan issuance was robust in recent months. Lending in private credit markets continued at a solid pace in July. After relatively strong growth in the second quarter, C&I loan balances on banks’ books also continued to grow at a solid pace in July and August. Commercial real estate (CRE) loans continued to grow at a modest pace in July and August.

Our view: This language is similar to the reference in the June Fed minutes that read “real estate (CRE) loan growth was modest in April and May.” It is also consistent with the Mortgage Bankers Association release of its 2Q25 Commercial/Multifamily Mortgage Debt Outstanding Report, which showed that the level of commercial/multifamily mortgage debt outstanding had increased by $47.1 billion (1%) in the second quarter of 2025, bringing the total debt outstanding to about $4.88 trillion. Only three lender types saw quarter-over-quarter declines, but they collectively account for 3% of mortgage debt outstanding. Overall, the data suggests continued liquidity in CRE debt markets, characterized by attractive yields, conservative structures, and a robust pipeline of refinancing opportunities ahead.

See our complete analysis here: CRE debt outstanding climbs in lending’s golden era.

CMBS delinquency rates continue to rise

What did the Fed say? Credit quality was generally stable at levels somewhat weaker than during the pre-pandemic period. The credit performance of corporate bonds and leveraged loans remained generally stable, though the default rate for leveraged loans, that includes distressed exchanges, continued to be elevated. Delinquency rates on small business loans in June and July ticked up and were moderately above prepandemic levels. In the CRE market, CMBS delinquency rates remained elevated through August.

Regarding household credit quality, the delinquency rates on Federal Housing Administration mortgages remained at the upper end of their range over the past few years. By contrast, delinquency rates on most other mortgage loan types stayed near historical lows. In the second quarter, credit card and auto loan delinquency rates remained at elevated levels but were little changed.

Our view: Delinquency rates in the CMBS market remain elevated, signaling ongoing stress in specific property types. The overall +30-day delinquency rate was 6.7% in September 2025, roughly unchanged from August but up more than 160bps from a year earlier. Office loans stand out with the highest delinquency rate at nearly 11%, while retail (6.0%) and multifamily (5.8%) also show rising pressure. Conduit deals are seeing greater strain, with delinquencies above 8%, compared with 5.3% for higher-quality SASB structures.

By contrast, delinquencies remain far lower for other lender types. As of 2Q25, the Mortgage Bankers Association reported delinquency rates of just 0.5% for life insurers, 1.3% for banks and thrifts, and around 0.6% for Fannie Mae and Freddie Mac. This divergence underscores how stress is concentrated in securitized markets, which tend to finance riskier segments of the commercial real estate market.

Importantly, CMBS delinquency is a lagging indicator. After the Global Financial Crisis, defaults peaked nearly two years after property values had bottomed, with multifamily delinquency rising above 16% while office topped out near 11.5%. This cycle looks different: office is now the epicenter of stress, while challenges in other sectors remain more contained.

CMBS yields are stable to tightening

What did the Fed say? In domestic credit markets, borrowing costs generally declined but remained elevated relative to their average post–Global Financial Crisis (GFC) levels. Yields on corporate bonds decreased moderately, while yields on leveraged loans were little changed on net. Interest rates on commercial and industrial (C&I) and short-term business loans remained elevated relative to their post-GFC averages. Rates on 30-year fixed-rate conforming residential mortgages declined moderately, on net, and remained elevated. Yields on higher-rated tranches of commercial mortgage-backed securities (CMBS) moved down modestly, and those on lower-rated tranches of non-agency CMBS declined notably. Interest rates on existing credit card accounts continued to tick up through June, while offer rates on new credit cards were little changed.

Our view: This language compares to the June Fed minutes that read, “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.”

Spreads in the CMBS market have tightened meaningfully since the spring, signaling greater stability in credit conditions. Ten-year AAA fixed-rate bonds are now trading at 76bp as of October 8, 2025—12bp tighter since early June and well off their April peak of 108bp. Riskier tranches have rallied even more: BBB- bonds are at 475bp, 80bp tighter since June and down sharply from the 625bp peak in April.

This spread tightening provides a clearer signal of improving market health than delinquency rates, which tend to lag. Investor demand has also been reflected in issuance: nearly $31 billion of private-label CMBS came to market in 3Q25, bringing year-to-date volume to over $90 billion. At this pace, 2025 issuance is on track to surpass $120 billion—the strongest year since 2007.

Bottom line

For investors, the Fed’s October minutes reinforce a key message: while CMBS delinquency rates are elevated, they are a lagging indicator. The more actionable signals come from spreads and issuance, both of which point to resilient liquidity and improving credit conditions. With issuance on track for its strongest year since 2007 and spreads materially tighter from spring peaks, the CRE market continues to offer opportunities for disciplined investors who can look past headline delinquency data and focus on forward-looking credit indicators.
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