Borrowers in the US commercial real estate market face a significant challenge as nearly $1.5 trillion of debt comes due for repayment by the end of 2025, leading to a couple of big questions: Who will be willing to lend to them? And what will interest rates be by then?
“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, according to Morgan Stanley analyst James Egan and others. They wrote in an investor note this past week: “The maturity wall here is front-loaded. So are the associated risks.”
According to the investment bank, property valuations for office and retail spaces could drop by up to 40 percent from their peak, heightening the likelihood of defaults. Additionally, small and regional banks, which were the primary source of credit to the industry last year, are facing deposit outflows after the collapse of Silicon Valley Bank, which raises concerns about their ability to provide financing to borrowers, Bloomberg News reported this week.
The situation regarding the significant amount of debt in the US commercial real estate market is expected to worsen before it improves, with maturities projected to increase over the next four years and peak at $550 billion in 2027, as noted from Morgan Stanley.
Furthermore, banks possess over 50 percent of the agency commercial mortgage-backed securities, which are bonds supported by property loans and issued by government-sponsored entities such as Fannie Mae, thereby increasing their risk exposure to the sector, Bloomberg News reported further.
“The role that banks have played in this ecosystem, not only as lenders but also as buyers,” will serve to worsen the wave of refinancing coming due, the analysts predicted.
The concerns regarding increasing interest rates and defaults have already impacted CMBS deals, with sales of securities without government backing decreasing by approximately 80 percent in the first quarter compared to the previous year, based on data compiled by the outlet.
However, despite the pessimistic outlook, there are some positive developments. According to analysts, conservative lending practices that have been implemented following the financial crisis offer borrowers and their lenders some level of protection against decreasing property values.
Multifamily housing continues to enjoy a favorable outlook due to rising rents, which is why Blackstone Real Estate Income Trust delivered positive returns in February, despite an increasing number of investors submitting withdrawal requests. Owners of such properties will benefit from the availability of agency-backed loans when refinancing is required.
However, when we exclude apartment blocks, the challenges confronting banks become even more significant. As much as 70 percent of other commercial real estate loans set to mature within the next five years are under the control of banks, as outlined in the report, Bloomberg's report continued.
“Commercial real estate needs to re-price and alternative ways to refinance the debt are needed,” wrote the analysts.
The country has been in this situation before, and not all that long ago.
The 2008 housing crisis was a significant economic event that originated in the United States, where the housing market collapsed, leading to a severe financial crisis. It was caused by a combination of factors, including an increase in subprime mortgage lending, a housing bubble, and a lack of regulation in the financial sector.
As housing prices plummeted, many homeowners found themselves with mortgages that exceeded the value of their homes, leading to widespread foreclosures and the collapse of major financial institutions. The crisis had global repercussions, leading to a deep recession and a long-lasting impact on the world economy. And banks around the country were in danger of collapsing, while some did.
The problem is not just limited to the United States. According to a note from Bloomberg Intelligence analyst Tolu Alamutu, European real estate issuers face over €24 billion in repayments for the remainder of the year.
We are definitely seeing real estate companies do all they can to deliver -- scaling back investment programs, more joint ventures, bond buybacks and where possible, dividend cuts,” she said in an email. “Disposals are a key focus too. Some recent comments from real estate issuers suggest it’s still not easy to sell large portfolios.”
Sources include:
Please contact us for more information.