JPM-2025 CMBS Outlook Wheat from chaff-20250826

Wheat from chaff

•For our 2025 outlook, we have a constructive view on the new issue CMBS market,that broadly selects for better collateral and sponsorship. Meanwhile, we remain con-cerned about the credit issues buried in legacy exposures

•Our economists see uncertainty in the US outlook, with both upside and downside risksto growth under the new administration. With that in mind, they see real GDP moderat-ing from 2.4% in 2024 to 2.0% in 2025, core PCE moderating from 2.8% in 2024 to2.3% in 2025, and the unemployment rate rising marginally to 4.5% by 2Q25, from4.2% today. They expect another 100bp of cuts to take the current Fed funds range of4.50-4.75% to 3.50-3.75% by 3Q25. Our rates strategists see 5- and 10-year Treasuryyields ending next year at 4% and 4.25%, respectively

•A lot of the risks to the CMBS market in the last two years were driven by interest ratesand their effect on cap rates/valuations and sagging office market fundamentals. Look-ing forward, the narrative shifts back to cashflow growth, which is what ultimatelymatters in a higher for longer environment

•In 2025, we look for modest CRE rent growth of just +2%, roughly unchanged from2024. Tighter spreads can offset higher rates, keeping mortgage rates in the 6-7% area.This can anchor cap rates and support more acquisition and financing activity

•We look for CMBS gross issuance to grow from $230bn in 2024 to $285bn in 2025(+24% y/y). Leverage on new issue can expand to support more activity and collat-eral selection will continue to skew toward in-favor asset classes with strong cash-flow growth prospects under pro-growth policies...

•...However, we expect to see stress measures worsen in CMBS, with private labelserious delinquency rates rising from 5% today to 6.5% by YE25. Foreclosure/REOs should also grow•We expect modest spread tightening for benchmark CMBS next year. We see 10yr con-duit CMBS LCF AAA spreads at J+75 by YE25; 10yr Freddie K A2s at J+35. 10yrconduit BBB-s can continue to grind tighter on sentiment and we expect them to end2025 at J+460

•The results of our 2025 Outlook Securitized Products Investor Survey show that inves-tors believe private label CMBS offers the second most value behind Agency MBS

•We continue to project ~5% cumulative losses for 2.0 conduit CMBS in our BaseCase