Storm Clouds Over mREITs Begin to Recede – Sept. 15, 2025
Mortgage REIT see improving returns and they’re putting problem loans behind them
For a corporate structure that owes its existence to a rider in an obscure 1960 bill governing taxes on cigars, the REIT has proven to be versatile as well as resilient over the decades. Not all classes of REIT have flourished regardless of macroeconomic conditions, though, and one sector that has had to weather choppy conditions in the past few years has been the mortgage REIT.
“Commercial mREITs have been on the front lines of a commercial real estate correction and rising loan stress that occurred in the wake of Federal Reserve rate hikes, with office loans especially hard hit due to the added challenges created by remote working,” Nareit reported last week.
Among the effects of this correction has been a hit to the book value of mREITs. Citing research from Keefe, Bruyette & Woods, Nareit reported that the median book value of commercial mREITs has declined 21% since mid-2022, when the Fed began tightening its monetary policy.
“That’s a huge decline, and the worst performers are down 50%,” Jade Rahmani, managing director, CRE finance at KBW, told Nareit. Share value in many instances has suffered as well, with one benchmark mREIT seeing stock prices erode by nearly 40% compared to three years ago.
However, the Nareit article also sees the storm clouds over commercial mREITs beginning to recede. Nareit’s Beth Mattson-Teig cited a combination of factors: improving returns, expectations of interest rate cuts, shrinking credit challenges, diversification of income and increasing loan originations.
Even as book values are continuing to slide, total returns “appear to have come through the worst of it, and the market is starting to price in a recovery,” Mattson-Teig wrote. The issue with book values has been tied to a predominance of commercial mortgages that reflected peak valuations from a few years ago.
Coming into this year, about two-thirds of the loans on mREITs’ books were originated in 2022 or earlier. The value of those loans is down about 25% from the peak.
“What we’ve seen coming into 2025 through the first half is that the backdrop has improved in such a way that those loans can now refinance into stabilized capital sources,” Harsh Hemnani, senior analyst with Green Street, told Nareit. As a result, any foreclosure or REO properties that the REITs had to deal with can now be sold at close to the basis, reported Mattson-Teig.
According to Green Street, credit challenges also are shrinking. That’s because the healthy 2024-2025 vintage loans, written at above-average spreads and reset valuations, now account for larger shares of mREIT portfolios.
“Once the REITs resolve those problem assets and deploy capital into new loans, their return on equity starts to look better, and that’s what the public market is pricing in,” wrote Mattson-Teig. “So, the overall backdrop for commercial mREITs is healthier, according to analysts.”
An improved vital sign for mREiTs is total returns: 7.7% year to date across the sector. For some of the 800-lb. gorillas among mREITs, returns are even better. Blackstone Mortgage Trust, Starwood Property Trust and Apollo Commercial Real Estate Finance all are posting positive total returns year-to-date that are “at or close to double digits.”