Key Points:

• Assumable debt accompanies a property at sale and can be one way to complete a transaction when other forms of credit are scarce or costly. 
  
  
• Assumable is typically more attractive when outstanding interest rates on mortgages are lower than prevailing rates for new loans.
  
  
• Though assumable debt use is currently lower than in the years preceding the pandemic, it has increased over the last two years and will likely continue to increase next year.

Despite the onset of the Federal Reserve’s (Fed) rate cut cycle in September, higher borrowing costs continue to stifle commercial real estate (CRE) sales activity. Based on preliminary data, CRE sales volume continued to stagnate in the third quarter, declining by 7 percent compared to the second quarter of 2024 and 4 percent compared to one year ago. With credit scarcer and costlier than it was in 2021 – before the Fed starting hiking interest rates – both buyers and sellers are exploring creative ways to make transactions work. One such way is with assumable debt, the use of which has grown steadily over the last two years.

“As the new year approaches, and the gradual thawing of the frozen CRE sales market begins more in earnest, assumable debt is poised to play a growing role in the CRE recovery.”

Taking the Mortgage with the Building 

An assumable mortgage is a loan that can be transferred to the buyer along with the building at sale. Assumable debt tends to be used more frequently in challenging times since, when credit is flowing freely, it’s easier to get a new loan. Conversely, when new, low-priced debt is hard to find, taking an existing mortgage along with the property at purchase is a way to facilitate a transaction that may not otherwise occur. When this happens, the buyer is said to “assume” the mortgage responsibilities of the seller, hence the name “assumable debt.” 

Assumable loans are particularly attractive to buyers when, as is the case today, outstanding mortgages have meaningfully lower interest rates than prevailing rates on new loans. From a seller’s perspective, having an assumable loan can attract additional demand for their property, since the buyer’s debt payments after closing will be lower than with a new, higher interest rate loan. In some cases, this may even allow the seller to charge a premium for their property at sale.

Despite the possible benefits to buyers and sellers, the vast majority of CRE mortgages are not assumable because it’s typically not in the lender’s interest. Lenders undergo rigorous diligence processes before lending, and they may not be comfortable with the new borrower’s – the buyer’s – ability to repay. As a result, most CRE loans include clauses that allow the lender to demand repayment of their loan at the time of a sale, or to instead be able to block the sale. Lenders usually face an investment tradeoff with limited upside (the interest rate on the loan) but stand to potentially lose their entire investment if the borrower is unable to repay. The need to avoid losses is why most lenders demand a certain degree of control over a borrower selling a property that they’ve lent money against. 

So, why do assumable loans exist at all? Well, lenders operate in a competitive industry and are often highly dependent on their relationships for sourcing new transactions. Assumable clauses are sometimes offered to borrowers that the lender is familiar with to support the relationship, or to new customers if they’re trying to win business. 

Slower Times Call for Creative Solutions

Higher interest rates over the last two and a half years have led to an increased use of assumable debt in CRE sales transactions. As the chart shows, assumable debt use has more than doubled compared to the 12 months ending in the third quarter of 2022, when it hit a trough of 0.8 percent of all CRE sales. By contrast, in the 12 months ending in the third quarter of this year, assumable debt accounts for 2 percent of all CRE sales. 

Despite the increased use of assumable debt compared to two years ago, a lower proportion of sales are using assumable debt now than in the five years preceding the pandemic. This is primarily due to the sharp decline in assumable debt use that began in 2021. At the time, there was an abundance of new debt available that was cheaper than rates on outstanding loans from the pre-pandemic period. Now that the opposite is true – new debt is on average more expensive than existing debt – assumable debt use will likely increase throughout 2025.

That said, it’s unlikely that assumable debt usage will climb to the levels seen following the Global Financial Crisis (GFC). Back then, assumable debt usage peaked at 10 percent of all CRE sales transactions in the second half of 2010. While debt is more expensive today than it was back then, the GFC was characterized by a severe liquidity crunch, which means that the quantity of cash in the financial system rapidly and severely contracted. This made it extremely difficult to make any large purchases of financial assets, including of CRE properties. As a result, the use of assumable debt in CRE sales increased substantially.

By contrast, there isn’t a shortage of cash in the system now, even though the cash that is there is being deployed in limited quantities. Near-record amounts of equity capital is sitting on the sidelines waiting to re-enter the CRE market to purchase a property, but only at the right price. Debt availability has certainly declined, but most lenders that aren’t facing significant near-term impairments are still willing to lend against high quality, cash-flowing properties, just at higher interest rates than many borrowers can afford. 

As the new year approaches, and the gradual thawing of the frozen CRE sales market begins in earnest, assumable debt is poised to play a growing role in the CRE recovery.