The performance of mortgage-backed securities tied to U.S. commercial real estate is going to come under growing pressure this year, due to the economic fallout from trade-related disruptions and elevated policy uncertainty, Fitch Ratings says.
In a new report, the rating agency said that U.S. commercial mortgage-backed securities (CMBS) will see their performance deteriorate as higher tariffs produce weaker global growth and higher inflation, which will keep interest rates elevated too.
Alongside the weaker economic environment, increased policy 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.”
Certain market segments, such as West Coast port markets, “will be most affected by reduced trade given their outsized exposure to China trade and existing oversupply in key submarkets,” it said.
While the U.S. and China recently backed off from their most extreme tariffs, the effective U.S. tariff rate on China remains much higher than any other country, Fitch noted.
Against this backdrop, “trade uncertainty and lower import volumes will pressure smaller, less well-capitalized tenants, reducing industrial space demand and increasing vacancy rates,” it said.
And even if onshoring drives higher demand for industrial real estate, the high rents in California “could make it less attractive for some businesses to locate or expand operations there compared to other U.S. markets,” it said.
Additionally, demand for retail real estate is also expected to weaken, as U.S. retailers that rely on Chinese supply chains scale back their business ambitions.
“Moreover, rising prices, coupled with a macroeconomic slowdown and reduced consumer spending power, could lead retail tenants to rationalize their real estate footprint,” it said.
As a result, Fitch has lowered its asset performance outlook for retail CMBS in 2025 to deteriorating from neutral.
The weaker economy and increased policy uncertainty that complicates long-term investment decisions for U.S. companies, will likely also weigh on office leasing volumes, it noted.
And, factors such as lower consumer confidence and reduced international travel to the U.S. is also already pressuring hotel demand, Fitch said. At the same time, the hotel and food services sectors could see costs rise as tougher immigration restrictions reduce the supply of labour, and raise construction costs.
Certain segments of the real estate market are more sheltered from these impacts, such as the storage industry, which typically sees stronger demand during periods of slower economic growth.
And, the multi-family sector may benefit from slower supply growth in key markets too, it said.
“Increased construction costs due to tariffs and tight labour supply are likely to hamper new construction, supporting occupancy and rent growth for existing supply,” Fitch said. It’s raised its asset performance outlook for the sector to neutral from deteriorating.