Mind the Gap: Market Indicators to Watch in 2025 and 2026

An update to my last piece on Key Market Influences to Watch in 2024 is long overdue. Please find below a comparison of prior year market data to current trends and the implications for borrowers.

Monetary Supply – Inflation is Sticky and Steady

As of April 30, 2025, the M2 money supply in the United States was approximately $21.86 trillion, surprisingly higher than in November 30, 2023, when it was $20.70 trillion, and a whopping 42% increase compared to January 31, 2020, at $15.4 trillion.  This indicates continued inflation in the money supply with no signs of slowing, with the “Big Beautiful Bill” potentially adding $2 trillion.

Fed Funds Rate – Wait-And-See Approach

The Federal Reserve is projecting just two quarter-point rate cuts, which is a reduction from previous cut forecasts. Bond vigilantes want more term premium for locking up investable capital for 10 years at 4.5%, versus the Money Markets Funds average 4.25%.

Notes Coming Due – End of Extend and Pretend

Between March 2024 and March 2025, loan modifications nearly doubled, surpassing $39.3 billion. This surge in restructuring activity indicates that lenders are “buying time” in hopes that market conditions will improve. Ultimately, borrowers are left with two options: (1) cash-in refinance, or (2) sell.  Assuming net operating income (NOI) stays static, the increase in interest rates and cap rates reflect an approximate +/-30% increase in interest payments and approximately +/-30% reduction in asset value.

Take Aways:

• Insurance companies will continue benchmarking low-priced leaders by comparing spreads to corresponding bond ratings and offering balance sheet loans priced relative to Treasury yields.
• With 5-year notes switching to variable rates or coming due, many banks are trying to increase deposits and shrink the size of their commercial real estate portfolios to balance loan-to-deposit ratios as asset values decline.
• CMBS and agency lenders will remain a haven for higher LTVs and interest only options.
• Increased loan modifications and cautious lending practices mean that securing favorable terms may be more challenging.
• Higher interest rates and increased cap rates lead to higher borrowing costs due to lower debt service coverage ratios and higher loan to value (LTVs) (i.e. increases in risk premium).

These contributing factors make it essential for borrowers to work closely with commercial mortgage bankers to explore all available options.