Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is, who is going to lend to them?
“Refinancing risks are front and centre” for owners of properties, from office buildings to stores and warehouses, Morgan Stanley analysts, including James Egan, wrote in a note last week.
“The maturity wall here is front-loaded. So are the associated risks.”
The investment bank estimates office and retail property valuations could fall as much as 40 per cent from peak to trough, increasing the risk of defaults.
Adding to the problem, small and regional banks — the biggest source of credit to the industry last year — have been hit by depositors pulling out after the demise of Silicon Valley Bank, raising concerns that this will crimp their ability to provide finance.
The debt is set to get worse before it gets better.
Maturities climb for the coming four years, peaking at $550 billion in 2027, according to the Morgan Stanley note.
Banks also own more than half of the agency commercial mortgage-backed securities (CMBS) — bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae — increasing their exposure to the sector.
“The role that banks have played in this ecosystem, not only as lenders but also as buyers”, will compound the wave of refinancing coming due, the analysts wrote.
Rising interest rates and worries about defaults have already hurt CMBS deals.
Sales of the securities without government backing fell about 80 per cent in the first quarter from a year earlier, according to data compiled by Bloomberg News.
Amid the gloom, there are some slivers of good news.
Conservative lending standards after the financial crisis provide borrowers, and in turn their lenders, with some degree of protection from falling values, the analysts wrote.
Sentiment toward multi-family housing also remains much more positive as rents continue to rise.
That is one reason Blackstone Real Estate Income Trust had a positive return in February even as rising numbers of investors lodge withdrawal requests.
The availability of agency-backed loans will help owners of those properties when they need to refinance.
But when apartment blocks are excluded, the scale of the problems facing banks becomes even starker.
As much as 70 per cent of the other commercial real estate loans that mature over the next five years are held by banks, according to the report.
“Commercial real estate needs to re-price and alternative ways to refinance the debt are needed,” the analysts said.
European real estate issuers, meanwhile, have the equivalent of more than €24 billion due for repayment over the remainder of the year, Bloomberg Intelligence analyst Tolu Alamutu wrote in a note.
“We are definitely seeing real estate companies do all they can to delever — scaling back investment programmes, more joint ventures, bond buybacks and where possible, dividend cuts,” Ms Alamutu said.
“Disposals are a key focus too. Some recent comments from real estate issuers suggest it’s still not easy to sell large portfolios.”