Predicting which asset types within real estate will face the most delinquencies in 2025 depends on several macroeconomic and market-specific factors, including interest rate trends, economic growth, inflation, and specific market dynamics. Based on current trends (as of late 2024), here are some likely scenarios:
1. Commercial Office Space
- Reasons for Vulnerability: Work-from-home trends: The persistence of hybrid work models is reducing demand for traditional office space. High vacancy rates: Many urban centers report vacancy rates exceeding 20%, leading to cash flow issues for landlords. Refinancing challenges: Many office properties are facing maturing loans in a high-interest-rate environment, making refinancing costly or infeasible.
- Potential Impact: Office properties in secondary or tertiary markets are at the highest risk.
- Reasons for Vulnerability: E-commerce competition: Continued growth of online shopping puts pressure on brick-and-mortar retailers. Rising consumer debt: Slower consumer spending, especially in discretionary categories, impacts retail tenants’ ability to pay rent. Tenant bankruptcies: If key tenants in retail centers go bankrupt, landlords may struggle with delinquencies.
- Potential Impact: Older malls and strip centers without mixed-use or experiential offerings will face the greatest risks.
3. Class B & C Multifamily Properties
- Reasons for Vulnerability: Rising operating costs: Higher interest rates, insurance premiums, and maintenance costs reduce cash flow for landlords. Affordability challenges: Renters in lower-income brackets are more likely to miss rent payments during economic downturns. Shift in demand: Oversupply in certain markets (e.g., luxury multifamily) could reduce rental growth in mid-tier properties.
- Potential Impact: Suburban or rural properties with low demand could see increased delinquencies.
4. Hospitality Real Estate
- Reasons for Vulnerability: Economic sensitivity: Hotels and resorts depend heavily on discretionary travel, which declines during economic slowdowns. Financing difficulties: Short-term loans with variable rates are common in this sector, leading to higher costs in a rising rate environment. Uneven recovery: Luxury and urban hotels may recover faster than mid-tier and budget properties in less desirable locations.
- Potential Impact: Independent hotels or those in overbuilt markets could be at the highest risk.
5. Single-Family Rentals (SFRs)
- Reasons for Vulnerability: Oversupply in some markets: Rapid expansion by institutional investors has created localized gluts. Tenant affordability: Rising rents may outpace wage growth, leading to increased evictions and vacancies. Regulatory pressures: Rent control measures in some states could cap income growth for landlords.
- Potential Impact: Markets with heavy investor activity (e.g., Sunbelt regions) could see localized stress.
- Interest Rates: Continued high rates will strain refinancing for all asset classes.
- Economic Growth: A recession could disproportionately affect discretionary assets like retail and hospitality.
- Market-Specific Factors: Local oversupply, demographic shifts, and regulatory changes will determine risks for different asset types.
