Asset performance outlooks across many North American structured finance sectors are deteriorating for 2025, Fitch Ratings reported, noting that higher-leveraged and lower-income borrowers especially vulnerable to affordability and refinancing challenges. A cooling labor market is likely to offset some of the benefits of falling interest rates, according to Fitch.

The rating agency said CMBS asset performance will continue to diverge between older assets attracting lower demand and in need of capital funding, and newer, more flexible and green properties in prime locations. Tighter lending conditions and demand-side pressures will also continue to hinder performance, as will a continued increase in expenses, driven by rising insurance, labor and climate-related costs.

Fitch’s outlook for most RMBS subsectors is neutral, except non-prime RMBS, where delinquencies are forecast to increase to 3.25% in 2025, from 2.38% in October 2024. ABS asset performance will be broadly stable in 2025, although subprime borrowers remain vulnerable to cost of living stresses and higher debt servicing costs.

“Supportive market conditions over the last 12 months led to a high level of refinancing and repricing by both loan and CLO issuers,” according to Fitch. “The asset performance outlook for CLOs is improving in 2025, with broadly syndicated loans leveraged defaults expected to fall as investor confidence and falling interest rates support market activity.”

Fitch sees increased policy uncertainty with the incoming Trump administration. Increased tariffs may introduce inflationary pressures that slow the pace of rate cuts, increasing the financial burden on households and businesses and leading to higher delinquencies and defaults. However, tax cuts may compensate for higher costs stemming from tariffs.

Kroll Bond Rating Agency (KBRA) predicted “a record year” for CMBS in 2025, with issuance and special servicing volume expected to reach “peak levels not seen since the global financial crisis” of 15 years ago. At the same time, though, KBRA warned that “there will continue to be credit challenges on outstanding CMBS.” 

The delinquency and special servicing rates for CMBS loans are expected to continue on their upward trajectory, KBRA said in a new report. “Negative rating actions doubled year-to-date (YTD) in KBRA-rated CMBS transactions compared to 2023 and our expectations are for further elevated numbers of downgrades next year,” the report stated.  

Additionally, with approximately 32% of the KBRA-rated maturing loans in 2025 taking place in the office sector, rating pressure will continue due to the sector’s valuation declines compounded by their refinancing challenges.  

Overall, KBRA reported, “With the expected dollar volume growth of the specially serviced loans, we could see the special servicing rate surpass that of the prior peak of 10.5%, which came in the wake of the pandemic—the main difference is that the volume of specially serviced loans decreased fairly rapidly after peaking during the pandemic. This time around, we expect longer resolution periods that will push volumes higher.”