Optimism in U.S. Commercial Real Estate Financing Declines

By Matt Tracy

WASHINGTON (Reuters) – Optimism in the U.S. market for commercial real estate financing witnessed its second largest drop ever in the first quarter, triggered by President Donald Trump’s new tariff policies, a new survey found.

In a survey of CRE financing participants conducted from March 31 to April 7, the CRE Finance Council reported a 30.5% decline in optimism since the fourth quarter. This quarterly drop is only exceeded by the onset of the Covid-19 pandemic at the start of 2020.

Eighty percent of respondents expect economic conditions to worsen over the next 12 months, a significant increase from just 12% in the fourth quarter of 2024. Half of those surveyed anticipate deteriorating conditions in the CRE market over the same period.

Six in ten participants identified escalating risk tied to the Trump administration’s trade policies and rising geopolitical tensions as factors affecting their outlook. Additionally, 60% expressed concerns about increased construction costs stemming from the new tariffs.

Approximately 70% of respondents predict the office sector will suffer due to cancellations of federal government building leases by the Department of Government Efficiency.

“The dramatic drop in our Sentiment Index clearly signals concern, but beneath the headline numbers we see pockets of cautious optimism, particularly regarding how lower interest rates might finally break the transaction logjam that has persisted through much of 2024,” said Lisa Pendergast, president and CEO of CREFC, in a press release.

Pendergast also noted the significant contrast between this quarter’s results and record high sentiment from the previous quarter, highlighting how rapidly market psychology can change due to evolving economic policies.

Among the positives, eight in ten participants expect the issuance of commercial mortgage-backed securities (CMBS) to remain stable or decline moderately, following a strong fourth quarter for CMBS dealmaking, according to the CREFC.