Tariff Headwinds Likely to Buffet CMBS Asset Performance

U.S. CMBS asset performance will deteriorate due to tariff-related headwinds such as inflation, elevated interest rates and decelerating global growth, according to Fitch Ratings. However, the rating agency noted that certain sectors are somewhat insulated from these pressures, notably multifamily.

“Policy shifts are introducing considerable uncertainty within commercial real estate, a lagging cyclical sector,” Fitch reported. “This uncertainty is likely to lead to a pause in major capital investments and new developments and negatively impact tenant decision-making due to rising and competing costs.”

Industrial real estate, particularly in West Coast port markets, will be most affected by reduced trade given an “outsized exposure” to China trade and existing oversupply in key submarkets like California’s Inland Empire. “Fitch may apply additional stresses to property net cash flows and/or raise cap rates for port-centric industrial properties with tenants exposed to tariff pressures.” the rating agency reported.

Although retail real estate has stabilized in recent years, Fitch expects softening demand “as retailers reliant on Chinese supply chains scale back their store expansions or accelerate their store closure plans, making it difficult for power centers and malls to backfill vacancies quickly. Increased vacancies may place downward pressure on rents.” Fitch has revised its retail CMBS asset performance outlook for 2025 to deteriorating from neutral.

In the office sector, limited new supply could keep demand healthy for modern, Class A trophy properties in markets such as Manhattan, but other submarket recoveries are likely to cool. “Moreover, we are nearing the five-year mark from pandemic-related stress, when banks typically become more aggressive in resolving problem loans,” Fitch reported. “This could lead to more distressed sales and appraisals that pressure CMBS ratings if realized values are below our stressed assumptions.”

Weak consumer confidence and lower inbound international travel have already put pressure on leisure hotel demand, Fitch reported, and labor supply pressures due to immigration restrictions could drive labor expense growth, with accommodation and food services among the most impacted sectors. Tariff-related increases in construction costs could also lead hotel owners to delay property improvements or capital projects.

That said, two residential-related sectors, self-storage and multifamily, are expected to hold up well. “The multifamily sector is well-positioned given low housing affordability and moderating supply growth in key markets,” according to Fitch. “Increased construction costs due to tariffs and tight labor supply are likely to hamper new construction, supporting occupancy and rent growth for existing supply. We have moved our multifamily 2025 asset performance outlook to neutral from deteriorating.”