AP: Recent excerpts from a Wall Street Journal article on distressed commercial real estate and some of our comments.
The troubled commercial real estate market is bracing for a
record amount of maturing loans, boosting the prospect of a surge in defaults
as property owners are forced to refinance at higher rates.
In
2023, $541 billion in debt backed by office buildings, hotels, apartments and
other types of commercial real estate came due, the highest amount ever for a
single year, according to the data firm Trepp. Commercial-debt maturities are
expected to continue rising, with more than $2.2 trillion coming due between
now and the end of 2027, Trepp said.
Most of these loans have
so far been repaid or extended. In 2022 and 2023, many owners were able to
exercise one- or two-year extensions built into their original loans.
Weitz Commercial Note: The questions becomes: do banks/ lenders keep extending or do they force foreclosure/ re-finance? My guess is many will kick the can down the road to save their own books and not be forced to take the loss, but all this will do is delay a reckoning at some point most likely.
“Borrowers have simply
been unwilling to accept reality,” said Gwen Roush, senior vice president
at DBRS Morningstar. “But reality has to come due at some point.”
Unlike home mortgages,
whose principal is paid off over time, most commercial mortgages are interest
only. That means that when the debt matures, the borrower has to refinance or
pay off the principal.
Weitz Commercial Note: This isn’t necessarily true. Most have balloon
payments that are of a shorter duration than the typical residential loan.
While office-building
owners have been especially hard-hit from remote and hybrid work, the damage to
the commercial real estate sector is widespread. Vacancy rates are
increasing in some multifamily markets,
making it harder for many of those landlords to raise rents or make payments on
floating-rate debt. Industrial space, long the darling of Wall Street for its use
as e-commerce hubs, is also showing signs of weakness.
Lender
losses on commercial-property loans have started to increase and look poised to
rise farther. Fitch Ratings projects the delinquency rate of commercial
mortgage loans that have been converted into securities will increase to 4.5%
in 2024 and to 4.9% in 2025—more than doubling the 2.25% rate in 2023 as of
November. Retail, hotel and office delinquencies are all expected to rise,
Fitch said.
The decline in inflation and interest rates in recent months
has eased the pain. But most borrowers still have to refinance at much
higher rates than those of their maturing loans.
“For commercial real
estate, rate cuts can’t come fast enough,” said Matthew Anderson, managing
director at Trepp.
Financial regulators are
concerned that commercial-property losses could spill over into the broader
financial system. “Sales of financially distressed properties can…lead to a
broader downward valuation spiral and even reduce municipalities’ property tax
revenues,” according to the Financial Stability Oversight Council, a
federal government organization created after the 2008-09 financial crisis to
monitor risks to the financial system.
In its 2023 annual
report, the council warned that financial institutions need to “better
understand” their exposure to commercial real estate. And that isn’t only from
their own property-loan portfolios. They should examine loans they made to
other real-estate creditors, the report said.
More than $50 billion of
the loans maturing this year were made by nonbank lenders such as funds
operated by private-equity firms and mortgage real estate investment trusts,
according to Trepp.
When loans mature,
refinancing by far is the preferred route, but that can be tricky when credit
markets are coping with the Federal Reserve’s fastest hike in interest rates
since the 1980s.
“You need someone to
hand the baton to,” said Jade Rahmani, an analyst at Keefe, Bruyette &
Woods. “When you have these interest-rate shocks, there can be no one there.”
The upshot: Many
commercial-property borrowers will have to work out deals with existing
creditors when loans mature. Thaddeus Wilson, a partner at the law
firm King & Spalding, said he has been involved in about 50 such workout
negotiations in the past year, compared with just a few a year in normal times.
“We’ve
seen deals in every market in multiple asset classes,” Wilson said.
The weak property sales
market has complicated workout negotiations, making it harder for borrowers and
lenders to agree on what properties are worth. Borrowers tend to have a more
optimistic view on values than lenders, who are often looking at worst-case
scenarios, said Wilson of King & Spalding.
“At some point borrowers
are going to have to come to grips that their lenders might be right about the
values and look at it from the worst-case scenario,” he said.
Weitz Commercial:
I’ve been writing about this stuff for months/ years on Facebook (Forllow @WeitzCommercial) but will
start to focus more on the blog writing of this situation. Frankly, one can
expect it to get better before it gets worse. We see the next few years as a
struggle at best and a paradigm shift of many sectors/ industries and even
capital markets in general at worse.
For more help
with lending advice, consider contacting a Lake Stevens mortgage lender, or with
commercial real estate sales or work outs, consider contacting a Lake StevensCommercial Real Estate Broker.
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