Commercial real estate loans totaling almost $1.8 trillion are set to mature before the end of 2026, according to Trepp. One sign of the accompanying stress is the commercial mortgage–backed security (CMBS) special servicing rate, with its latest numbers inching up to 8.2 percent, the highest since June 2021.
Although Fed Chairman Jerome Powell hinted that a rate cut may occur during September’s Federal Open Market Committee meeting, rate cuts may be too little and come too late for some participants. The commercial real estate market is focused on the rising stress among owners who face maturities and among bank lenders that may bear troubled loans. On the flip side, significant opportunistic capital is poised to seize distressed investments in debt and equity. We asked leading economists to dispel some of the noise around real estate loan maturities and share their views on what’s ahead.
Urban Land: What’s keeping you up at night when you think about this mountain of maturing commercial real estate debt, and what do you think the big ripple effects will be for deal-making over the next 12 to 18 months?
Brian Bailey, CRE, CCIM, Subject Matter Expert & Senior Policy Advisor, Commercial Real Estate, Federal Reserve Bank of Atlanta
The inability to accurately establish commercial property value is at the top of my 2024 risk list. Industry participants and lenders have expressed frustration about the inability to accurately establish pricing. For example, the same office building in a major city was valued by three sizable companies over a three-week period, and the results ranged from $8 million to $32 million. If you are the owner or lender, how do you plan with this wide range of values?
The inability to accurately value a commercial property creates greater amounts of friction, uncertainty, and hesitation, which can act as roadblocks to completing transactions.
Fortunately, some of the factors . . . contributing to the inability to accurately value commercial property have started to abate. This [shift] should result in greater price transparency, reduced uncertainty, [and] higher transaction volumes, and increase the amount of available capital.
Jessica Lee, CIO, Real Estate Credit, Manulife Investment Management
The hope was that 2023 would represent a trough. After all, transaction volume and CMBS issuance had fallen by [more than] 50 percent, year-over-year. So far, we’re seeing glimmers of a recovery. CMBS issuance for seven months in 2024 (just through the end of July) is up [more than] 25 percent versus all of 2023, for example. However, transaction volume still seems flat; bank lending continues to retreat; and monetary policy is on hold, perhaps until September, or even past the November elections. Signals are mixed as to whether we’ve hit bottom in terms of pricing and transaction activity.
What keeps us up at night, therefore, is making sure we’re well poised to take advantage of opportunities to invest while taking appropriate precautions against the very real risk of this being a “long bottom.” Consider how the recession that marked the Great Financial Crisis ended in June 2009, but CMBS delinquencies did not top out for another three years (in July 2012). We’re still on a path to a soft landing, so we are monitoring market conditions closely. And we are bullish about uncovering interesting opportunities to take advantage of uncertainty and volatility.
Lonnie Hendry, CRE, Chief Product Officer at Trepp Inc.
The broad-brush narrative paints a more pessimistic picture than what the data (to date) suggests. Outside of the office sector and a very small number of multifamily properties with floating-rate debt, the other [commercial real estate] sectors are performing very well and have been able to refinance at a respectable clip, even with increased interest rates. During the past 12 to 18 months . . . a large number of office property owners have successfully secured extensions and/or other modifications when faced with their respective maturing loans. These modifications have come at a cost to borrowers but, so far, [have] been at a price borrowers are willing to pay.
The primary thing keeping me up at night is trying to determine what happens when office borrowers are no longer willing to contribute fresh capital to extend (and not fully refinance) their loans. If borrowers decide they are throwing good money after bad, and start to walk away from their properties, we could see an acceleration of distress worse than anything the [commercial real estate] market has faced since the [Great Financial Crisis]. There have been a handful of distressed sales across multiple markets, with extremely low sales prices, but not enough of those transactions [have occurred] for those prices to become representative of the market.
If borrowers start walking away and lenders are forced to sell, that dynamic will shift very quickly, as banks would be forced to directly deal with their troubled loans. This [situation] would lead to even tighter credit conditions and less availability of lender capital to the market. The short-term negative impacts could be widespread. [Whereas] distressed office property appraisals have shown an average of 40–50 percent decline in value during 2023–2024, the broader market (and especially lenders) have been slow to mark offices down at the same pace. The distress that’s been pontificated for a year and a half—but [has] not materialized—could happen much more quickly if/when banks are forced to sell. As of now, forced sellers are the minority, but as soon as they become more prevalent, that narrative changes and the value loss discussion will become much more real. The silver lining in this scenario may be that the market pricing gets to the bottom more quickly, accelerating the market’s rebound.
Over the next 12 to 18 months I anticipate increased transaction volume in the distressed asset space, but those volumes will be subdued when compared to 2021 and the first half of 2022. Even with the unprecedented challenges facing [commercial real estate], the market has proven, once again, it is a reliant asset class where, I believe, investor demand will continue to outpace supply over the medium to long term.
Lea Overby, Head of CMBS Research at Barclays Capital
Fortunately, we are entering this debt maturity crisis with a better tool box of techniques that can help us get through it. Extensions within conduit CMBS have begun to rise, starting in the second half of 2022, and we expect most other lenders to likewise offer cooperative borrowers more time to secure refinancing. However, when we look at recently issued CMBS deals, cap rates remain very close to mortgage rates, indicating that [commercial real estate] equity holders are receiving pretty low returns, especially when compared to other investment opportunities. My fear is that many of these newly originated loans will struggle if we have any economic weakness in the near term.
Jamie Woodwell, Vice President and Head of Commercial Real Estate Research at the Mortgage Bankers Association
The [commercial real estate] finance market is large and diverse. There is $4.7 trillion of commercial mortgage debt outstanding, but it is spread across a range of property types and subtypes, lenders, markets and submarkets, borrowers, vintages, terms, and more. Each property is therefore facing a unique situation—some challenging, and others not—and broad brushstrokes don’t apply.
[At] the end of 2022, there was $660 billion of [commercial real estate] loans set to mature in 2024. By the end of 2023, that number had grown to $930 billion. The increase was driven by a large slug of loans that were extended—some through extension options that were built into their loans, and others through negotiations between lenders and borrowers. One key motivation behind some of those extensions was the hope/expectation that interest rates would fall, decreasing some of the headwinds a property may be facing at maturity.
It’s likely we’ll see another set of extensions from 2023 to 2024, once again with some actions driven by built-in options and others through negotiations. We’ll also see a number of situations where lenders and borrowers make the decision that time won’t heal the challenges that a particular property faces. To work through those situations, lenders and borrowers will continue to look at the specifics of each property and loan.
Right now, investors, lenders, and others are working through changes and uncertainty in space markets, equity markets, and debt markets that have reset [commercial real estate] conditions compared to when many deals were last consummated. Those changes have led many to sit on the sidelines and to not transact unless they have had to [do so]. It has also led many to look for medium-term (e.g., five-year) financing instead of more traditional 10-year terms.
Deal activity has been subdued in recent quarters, but increasing maturities, extensions, shorter-term financing, and other recent trends have stacked the amount of deal volume that will be primed to be conducted, once the logjam breaks. The question [then] will start to be “when,” not “if.”
Related reading:
Economist Snapshot: What the Latest Inflation Numbers Mean for Commercial Real Estate
Stay Alive Until ’25: ULI’s Real Estate Economic Forecast indicates positive trends heading into 2025
The Countdown to the End of Extend and Pretend
Opportunistic Funds Take Aim at Looming Distress: ULI Conversation with Scott Rechler of RXR
