Record debt maturity
The CRE market is facing a record amount of maturing loans in the next few years.
In 2023, $541 billion in debt came due for office buildings, retail, hotel, multifamily, industrial and other commercial properties, according to data analytics company Trepp.The Wall Street Journal noted this was the highest amount ever for a single year.
There will be no let up this year. Commercial debt maturities are expected to hit $544.3 billion in 2024 and another $533.2 billion in 2025. Between 2024 and the end of 2028, Trepp expects more than $2.8 trillion of commercial real estate debt to mature.
Much of that debt will have to be refinanced at higher rates due to the Federal Reserve’s aggressive fiscal policy in an effort to control inflation.
Those higher interest rates have led to a precipitous drop in demand for commercial properties, which has created downward pressure on property values — all bad news for the CRE sector.
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Soaring borrowing costs combined with increased vacancy rates and falling property values have forced some commercial property owners to default on their debts — which, as Yellen pointed out, is problematic for the lenders.
Over half of the outstanding CRE debt is held by U.S. banks and thrifts. Other major lenders include government-sponsored enterprises (GSEs), commercial mortgage-backed securities (CMBS) and insurance companies. None of these lenders are having a great time. According to Fitch Ratings, the delinquency rate of CMBS loans is expected to double from 2.25% in Nov. 2023 to 4.5% in 2024 and 4.9% in 2025.
Office properties are leading the misery, with CMBS office loan delinquencies expected to jump to 8.1% in 2024 and 9.9% in 2025, per Fitch. This is partly due to disproportionately high vacancy rates in the office space, due to the rise of remote work and an uptick in layoffs.
Even multifamily properties — often considered a safe haven in the distressed real estate sector — are expected to see a rise in CMBS loan delinquencies, from 0.62% in November 2023 to 1.3% in 2024 and 1.5% in 2025.
Is it safe to invest?
Through 2023, banks started reworking terms on maturing commercial real estate debt to stave off loan defaults — but to achieve this, many had to turn to private lenders for the additional capital, according to Reuters.
Initially, those solutions were focused on the struggling office sector, but they quickly spread to multifamily, industrial and hotels. However, by the end of the year, even those private lenders were struggling to keep up.
But Yellen assured lawmakers in early February that banking supervisors are hyper-focused on the issues plaguing the CRE sector. Specifically, she said regulators are looking to ensure lenders’ reserves and liquidity are adequate to handle the sector’s financial problems.
While keeping the CRE sector afloat, this regulatory scrutiny should also help to deter future bank failures — after the mini bank crisis in the spring of 2023.
For retail investors, the CRE market still offers strong opportunities — especially if you consider the cyclicality of the market. As things currently stand, there may be compelling opportunities to get bargain pricing for certain CRE assets, which may appreciate over time.
But as the market has proven, not all CRE assets are made equal. It’s important to go in with your eyes wide open and understand that there are many macro factors that can impact the performance of your commercial property investments.
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