This report does not constitute a rating action.
Key Takeaways
- The housing market is cooling, and we expect demand to remain soft, particularly for first-time buyers and markets with higher supply. High incentives will pressure margins.
- Higher costs from rising tariffs and softer demand will also pressure profitability for building materials issuers, particularly those more exposed to discretionary products.
- Operating performance for REITs remains resilient, as leasing momentum improves and asset values stabilize. However, speculative-grade companies still face refinancing risk given elevated financing costs, and property-level financing for weaker assets remains challenging.
- CRE services companies continued to benefit from a steady recovery in transaction activity with support from improved financing conditions, while stabilizing CRE conditions are driving increased originations for mortgage REITs.
S&P Global Ratings lowered its baseline forecast in May and now expects the U.S. economy to grow just 1.5% in 2025 and 1.7% in 2026. Higher tariffs and policy uncertainties are weighing on economic growth, while elevated interest rates continue to dampen consumer demand. The Federal Reserve will likely cut rates by 50 basis points (bps) in the fourth quarter of 2025, when greater downside risk to employment begins to outweigh the upside risks to its inflation outlook. We expect unemployment to peak at 4.7% in the first half of 2026 from 4.2% currently and estimate the probability of a recession starting within the next 12 months is 35%.
Across the U.S. real estate sector, elevated rates and economic uncertainty will weigh on demand. Homebuilders and building material issuers face increasing margin pressure from cost headwinds and a more limited ability to pass on higher costs because consumer sentiment is weakening as tariffs rise. On the other hand, commercial real estate continues to exhibit stability in operating performance despite the economic uncertainty.
Building Materials
Elevated interest rates and a cautious consumer will continue to drag revenue growth down for the sector. We expect housing starts to decrease modestly to 1.35 million units in 2025, while residential and nonresidential construction will also contract slightly. First-quarter operating performance was somewhat below our expectations, and the impact from tariff increases is likely to pressure margins further in the coming quarters. Still, we expect issuers to mitigate higher tariffs through measures like prices increases, supply chain adjustments, cost actions, and more. Overall demand softness in construction end markets may persist longer than previously expected due to slower-than-expected interest rate declines, persistently high material costs, and weakening consumer confidence.
We expect our negative rating bias to grow as margin pressure and higher refinancing costs potentially erode credit metrics cushions for lower-rated issuers; companies that pursued debt-financed acquisitions in 2024 will face heightened pressure. Currently, 17% of ratings have negative outlooks while 8% have positive outlooks or are on CreditWatch positive.
We recently lowered the rating on Oscar AcquisitionCo LLC to 'B-' from 'B' with a stable outlook. We also revised the outlook on BlueLinx Holdings Inc. (B+/Negative/--) to negative as weaker earnings from reduced construction activities pressured credit metrics. We assigned a ‘BB-‘ issuer credit rating to QXO Inc. (BB-/Stable/--) and also rated the debt issued to fund its acquisition of Beacon Roofing Supply.
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Homebuilders
The housing market is cooling as mortgage rates remain elevated and economic growth slows. Demand is waning from first-time home buyers as affordability challenges worsen. The 30-year mortgage rate remains close to 7% and prospects of higher unemployment are dampening consumer demand and stalling home purchases. Resale supply is rising, and in the Florida and Texas markets, that supply outweighs demand. This supply-demand imbalance is hindering pricing as house prices decelerate and incentives continue to increase in some of these communities.
As builders’ expectations for the spring selling season are now slower than expected, the level of incentives will likely remain elevated heading into the second half of the year; builders will need to move inventory, prioritizing pace over price. Furthermore, poor affordability slows demand, positioning elevated home inventory as a potential risk for the builders. Consequently, builders were lowering new starts in the first quarter and will continue through the second quarter. This reduction of activity will pressure gross margins through the year.
Although we expect revenues and deliveries to be modestly higher year-over-year in 2025, declining gross margins will impair EBITDA. We now forecast that EBITDA for our rated homebuilder universe will be down 2% in 2025.
Despite housing demand pulling back, positive rating actions outpaced the negative, with five upgrades compared to two downgrades thus far in 2025. We currently have 7% of ratings on negative outlook and 10% are on positive outlook or on Credit Watch positive.
We raised our issuer credit ratings one notch on Toll Brothers Inc. (BBB/Stable/--), Five Point Holdings LLC (B/Stable/--), and Brookfield Residential Properties ULC (B+/Stable/--). We also recently revised the outlook of Taylor Morrison Home Corp. (BB+/Positive/--) to positive from stable on solid credit metric cushion and placed the ratings of The New Home Co. (B/Watch Pos/--) on CreditWatch with positive implications after its announced the acquisition of Landsea Homes Corp. (B/Stable/--). In addition to these upgrades, we also downgraded our issuer credit ratings one notch on Adams Homes Inc. (B/Stable/--) and LGI Homes Inc. (B+/Negative/--) both due to weaker-than-expected earnings.
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CRE Services
In the first quarter of 2025, CRE services companies continued to benefit from a steady recovery in transaction activity. Investment sales experienced robust growth--particularly within the multifamily and industrial sectors--alongside a notable increase in mortgage loan origination, with support from improved CRE financing conditions.
Although recent tariff announcements have led to some volatility in interest rates, CRE funding markets remain robust. We anticipate gradual growth in transaction activity through the remainder of the year. Office leasing, the primary contributor to leasing revenue for most CRE servicers, achieved significant growth in the first quarter of 2025. This largely stemmed from the ongoing return-to-office trend and a rise in the number of large-scale lease transactions.
The resilient revenue segments (including facilities management, property management, and project management) benefitted further from new client wins and mandate expansion. Looking ahead, the growth of these businesses may further accelerate through merger and acquisition (M&A) activity. With improved balance sheet flexibility following recent deleveraging efforts, CRE servicers are well-positioned to pursue strategic transactions that enhance scale and capabilities.
Recently, we revised the rating outlook on Cushman & Wakefield PLC (BB-/Stable/--) to stable from negative due to improved credit metrics. While we expect a better operating environment over the next 12 months, we still maintain a negative outlook on Avison Young (Canada) Inc. (CCC/Negative/--), reflecting the company’s strained liquidity.
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CRE Fincos
In the first quarter, operating performance remained in line with our expectations as stabilizing conditions in the broader commercial real estate (CRE) market led to increased transactional activity and increased originations for mortgage REITs. Of the six CRE lenders we rate, loan loss provisions were 2%-6% of loans, and they realized losses through different remediation methods, such as asset sales, partial paydowns, or foreclosures.
We don't expect systemic pressure on CRE portfolios to the extent we've seen over the last few years because the number of loans deemed risky (ratings of '4' and '5') has stayed relatively unchanged on a sequential basis. CRE lenders' portfolios reflect the impact of high interest rates, and older vintage loans (originated prior to 2023) will further deteriorate asset quality. CRE lenders will likely remain selective with new originations and continue to preserve liquidity as they look to resolve troubled loans and expend capital on foreclosed properties.
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Equity REITs
Operating performance remained in line with our expectations for the first quarter as leasing momentum improved across most property types. Recovery in the office sector remains mixed because the West Coast office market remains subdued while the East Coast and Sun Belt regions are exhibiting stronger signs of recovery. Still, net effective rents are recovering in most markets despite still-high incentives as demand rebounds, particularly for higher-quality assets.
The demand for life science space has weakened amid uncertainty around funding cuts by the new U.S. administration, and we expect occupancy pressure to build modestly despite strong tenant retention because the new supply that entered the market in 2024 has yet to be absorbed. Retail REITs remain resilient despite concerns around the impact of rising tariffs on tenants. Retailers are focusing on growing the more profitable store channel over e-commerce while supply remains low.
Fundamentals for rental housing remains resilient as renting is still more affordable than buying a home in many markets amid elevated mortgage rates. We expect occupancy for rental housing to remain stable and for move-outs to remain low in most cases, supporting low single-digit percent net operating income (NOI) growth for most multifamily REITs.
Demand for industrial real estate could soften amid slowing economic growth and uncertainty related to tariffs, delaying tenant leasing activity or new development ramp up. Still, we believe industrial REITs can maintain stable credit metrics, supported by mark-to-market rent opportunities and tenant retention of 70%-80%.
Positive rating actions outpaced negative ones so far in 2025, with three upgrades compared to two downgrades. The negative rating bias has moderated to 15% of ratings compared to 11% of ratings with positive outlook.
We recently lowered the rating on Hudson Pacific Properties Inc. to ‘B’ and maintained a negative outlook as credit metrics continue to deteriorate and the company faces elevated refinancing risks, in our view. We revised the outlooks on Invitation Homes Inc. and American Homes 4 Rent to positive and affirmed our ‘BBB’ issuer credit ratings on both as we expect positive trends in the single-family rental sector over the next two years, supporting solid operating performance and sustaining good credit metrics. We upgraded Sun Communities Inc. (BBB+/Stable/--) to 'BBB+' following the sale of its marina business and debt reduction using asset sale proceeds.
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Related Research
- U.S. Retail Real Estate Investment Trust (REITs) Portfolio How Credit Stories Have Evolved
- North And Latin American REITs And Real Estate Operating Companies Ranking--Strongest To Weakest
- U.S. Economic Outlook Update: Higher Tariffs And Policy Uncertainty To Weaken Growth
| Primary Contact: | Ana Lai, CFA, New York 1-212-438-6895; ana.lai@spglobal.com |
| Secondary Contacts: | Maurice S Austin, New York city 1-212-438-2077; maurice.austin@spglobal.com |
| William R Ferara, Princeton town 1-212-438-1776; bill.ferara@spglobal.com | |
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| Igor Koyfman, New York city 1-212-438-5068; igor.koyfman@spglobal.com | |
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| Michael H Souers, Princeton town 1-212-438-2508; michael.souers@spglobal.com |
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