A massive wall of commercial real estate debt is coming due now and over the next two years, and today's high interest rates will make refinancing significantly more expensive. For some, that is cause for concern, but for others that presents an opportunity.
For 2027, an estimated $733.2 billion in commercial real estate loans will come due, according to Trepp. Roughly $800 billion was estimated to come due this year, albeit at lower interest rates earlier in the year.
"Elevated interest rates have made it increasingly difficult to refinance maturing commercial real estate debt, with little relief in sight," said Lonnie Hendry, chief product officer at Trepp. "As lenders pull back on loan extensions and modifications, more realized distress is likely to emerge, leading to greater loan losses while creating opportunities for investors to acquire assets at attractive valuations."
Industry Reaction
"If I had debt, I'd be petrified," said Richard LeFrak, executive chairman of the LeFrak Organization, on a recent Property Play podcast. "The extend and pretend party is over, and banks are being more aggressive about either selling off the loans or trying to dispose of the assets in one way or the other."
Over the past few years, lenders have been giving borrowers more time, expecting that interest rates would come down. Much of that is coming to an end, and lenders are starting to be more aggressive.
Office and multifamily are seeing the biggest comeuppance of all the sectors. The office delinquency rate in commercial mortgage-backed securities hit 12.16% in September, according to Trepp. But the office recovery is accelerating now, in both occupancy and valuations.
Multifamily is still in distress, working through a recent oversupply and weaker rents. Borrowers, many of whom refinanced their apartment buildings in 2021 and 2022 when interest rates were very low, would now have to refinance at about twice their original rates.
"We have the largest amount of multifamily debt that we've ever seen before, period, that is coming due, and one of the main points is that most of that debt was on floating rate mortgages," said Ari Rastegar, founder and CEO of Rastegar Capital.
This means borrowers will have to put in more cash because interest rates are higher and rents are lower, making the properties less valuable. Lenders will require more equity.
"So imagine if you originated a piece of multifamily debt on a bridge that was a two year bridge that had two one-year extensions, which is a very simple thing that a lot of bridge lenders have. Well, that rate would have originated around 4%, and now rates are up 525 basis points. It's at 9%," said Rastegar.
As rates go up, borrowers need more cash flow to justify the debt service, and some just don't have it. That presents the play on distressed assets.
"We are preparing for a massive buying opportunity, starting a global roadshow to be in front of people, both retail and institutional investors, to say exactly this story. When this happens, we need to be ready to buy everything, and that's what we're preparing to do," said Rastegar.
Borrowers are opting, in some cases, for cheaper, shorter-term financing. That, however, just pushes the problem down the road a few years. Multifamily financing is traditionally meant to be in place for ten years. The hope, however, is that property fundamentals will improve and interest rates will come down, but that is by no means guaranteed.
"We're starting to see some improvements in fundamentals, which should offset some of the distress that we're talking about," said Jason Morgan, co-CEO of Morgan Properties, one of the nation's largest apartment owners and managers. "But not nearly to the level that what someone would need from a 2021 and 2022 valuation perspective."
He said transaction volume has really come to a standstill, and deals that aren't under contract are falling out or getting repriced somewhere up to about 10%, anecdotally.
"So I would agree that the maturing debt, you know, situation within the multifamily sector is going to lead to a lot of opportunities for groups to come in and get bargain pricing compared to what they were a handful of years ago," said Morgan.
The problem, however, is that while the deals are getting repriced in favor of potential buyers, transactions are not moving. Sellers are unwilling.
"It still hasn't been a tidal wave of new opportunities because sellers haven't, you know, come to that reality, which is going to take place over the next few months," Morgan said.
