The Bill Is Coming Due on a Record Amount of Commercial Real Estate Debt

The Bill Is Coming Due on a Record Amount of Commercial Real Estate Debt
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More than $2.2 trillion in debt is maturing before 2028, and much of that will have to be refinanced at higher rates.

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. 

Now, those extensions are burning off. That is compelling many borrowers to confront the higher rate environment—along with higher vacancies and weakening cash flows—which is depressing property values. Some owners and creditors are also grappling with the expirations of deals they made early on during the pandemic to delay payments until the worst of the health crisis passed.

“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. 

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.

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