Commercial and Multifamily Mortgage Debt Rises as Lending Sees "Golden Era"

Market Overview

U.S. commercial and multifamily mortgage debt outstanding advanced by 1.0% in the second quarter of 2025, marking an increase of $47.1 billion to a total of $4.88 trillion. This growth, as reported by the Mortgage Bankers Association (MBA), signals continued liquidity and an optimistic outlook within the commercial real estate (CRE) lending landscape, characterized by some analysts as a "golden era" for the sector.

Sectoral Dynamics and Key Drivers

The expansion in mortgage debt was broad-based across major capital sources, with significant contributions from life insurance companies and Real Estate Investment Trusts (REITs). Multifamily mortgage debt alone climbed by $27.7 billion (1.3%) to $2.19 trillion during the quarter. Life insurance companies demonstrated robust activity, increasing their total commercial/multifamily mortgage debt holdings by 2.4%, equating to a $17.7 billion gain. Their multifamily mortgage holdings saw an even more substantial rise of 5.8%, or $14.2 billion. REITs also significantly increased their holdings, contributing to the overall market expansion with a 2.2% quarter-over-quarter increase in total commercial/multifamily mortgage debt outstanding.

Reggie Booker, MBA's Associate Vice President of Commercial Research, noted, "Every major capital source added to its holdings, but growth varied, with life insurance companies increasing their holdings by 2.4 percent and banks by 0.9 percent." The four largest investor groups continue to be banks and thrifts, federal agency and government-sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS), life insurance companies, and commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO), and other asset-backed securities (ABS) issues.

While the overall CRE debt market showed strength, the REIT sector exhibited divergent performance in Q3 2025, underscoring fundamental shifts in property demand. Data center REITs, propelled by an "AI-Driven Supercycle," emerged as top performers with 21.3% year-over-year Funds From Operations (FFO) growth. Digital Realty Trust (DLR), for instance, reported Q3 FFO per share of $1.89, an 18.2% year-over-year increase, and announced plans to double capacity by 2029. Industrial REITs also demonstrated resilience with 8.0% FFO growth, exemplified by Prologis (PLD), which posted 10.9% core FFO growth to $1.42 per share. In contrast, Office REITs continued to struggle, experiencing a -5.5% FFO growth and -19.7% year-to-date returns, largely attributed to the "Persistent Hybrid Work Impact."

Analysis of Investor Sentiment and Capital Flows

The increase in mortgage debt outstanding aligns with broader trends of enhanced liquidity and robust origination activity in the CRE debt markets. The MBA's 2Q25 Survey of Commercial/Multifamily Mortgage Banker Originations indicated a substantial increase of 48% quarter-over-quarter and 66% year-over-year in originations. This surge is further evidenced by a significant return of mortgage REITs to the Commercial Real Estate Collateralized Loan Obligation (CRE CLO) market. CRE CLO issuance in the first half of 2025 was nearly five times higher than in the same period of 2024, driven by the asset class's steady performance, demand from fixed-income investors, and the need for refinancing.

Mortgage REITs are particularly drawn to CRE CLOs for their non-economic benefits, such as non-recourse, non-mark-to-market facilities, and matched-term funding structures. Stephen Buschbom, director of research at Trepp, highlighted the importance of matched-term funding from CLOs for mortgage REITs originating two- or three-year bridge loans with potential five-year extensions.

Broader Implications and Historical Context

Recent monetary policy adjustments are also contributing to the improving CRE outlook. The Federal Reserve's 25 basis point rate cut is providing immediate relief, particularly for refinancing distressed office and multifamily properties. Hessam Nadji, CEO of Marcus & Millichap, described the rate cut as a "big relief" for a market that experienced a freeze in 2023. Signs of stabilization are emerging, with central business district office prices rising nearly 2% year-over-year in July, a notable reversal from a 25% decline a year prior.

Despite the positive momentum, the market faces a substantial challenge with approximately $2 trillion in debt maturities over the next two years. An estimated $591 billion of these loans, largely originated during periods of ultra-low interest rates (below 0.25% compared to today's 4.33%), are projected to be "potentially troubled," with office debt facing the most significant risk.

Expert Perspectives and Outlook

Rich Hill, Global Head of Real Estate Research & Strategy, observed the consistency of the debt outstanding figures with the strong origination survey results, reinforcing the narrative of a robust lending environment. The current market dynamics suggest a continued "golden era" for CRE lending, characterized by attractive yields and conservative structures, particularly within sectors like data centers and industrial properties.

Looking ahead, the market will closely monitor the success of refinancing efforts for maturing debt, particularly in vulnerable sectors such as office properties. Further interest rate movements and the continued divergence in performance across various CRE sub-markets will be key factors influencing the sector's trajectory in the coming quarters. The influx of capital through life insurance companies and the resurgence of CRE CLOs are expected to maintain liquidity, but the challenge of repricing older, low-interest rate debt remains a critical point of attention for investors and lenders.