According to the Wall Street Journal, commercial real estate faces significant debt, and rapidly rising interest rates and record vacancy could make it difficult for many borrowers to refinance.
Approximately $2.81 trillion in commercial real estate loans are scheduled to expire by 2028, meaning borrowers will have to pay the full amount in full or refinance their debts at higher interest rates. according to Based on data from market research group Trepp. Commercial mortgage payments are typically interest-only while the loan is in force, and once the loan expires, the borrower often refinances at current interest rates, but the commercial developer or property owner Doing so at a time when the company is in dire straits would mean paying significantly more. cash, according to In WSJ. (Related: Federal judge blocks multi-billion dollar acquisition of Spirit Airlines)
“Borrowers just don't want to accept reality,” Gwen Rausch, senior vice president at DBRS Morningstar, told the Journal. “But reality has to come someday.”
About $544.3 billion in commercial real estate loans will come due in 2023, the largest amount on record, and is expected to increase in the coming years, Trepp said.
According to the WSJ, most commercial real estate loans coming due were acquired and locked in at a time when interest rates were much lower, and refinancing would significantly increase the cost of owning that debt. It is said to mean. Additionally, the increasing number of companies allowing employees to work from home has increased vacancies in this sector, particularly in office space, reducing cash flow for many property owners who are struggling to sell or rent office space. There is.
Record amount of commercial real estate debt bills coming due https://t.co/GAShKAyOAU pic.twitter.com/rpOXFC1ofI
— Jesse Felder (@jessefelder) January 17, 2024
Commercial real estate interest rates are rising due to increases by the Federal Reserve to the federal funds rate, which currently ranges from 5.25% to 5.50% and is expected to increase from March 2022. This is the highest interest rate in 22 years after a series of hikes. The purpose is to combat high inflation. Borrowers could get some relief next year from a cut in the federal funds rate, with the median Fed board member expecting the year-end rate to be 4.6%.
Delinquencies on commercial mortgage-backed securities are projected to increase in the coming years as more loans come due. according to to Fitch ratings. The delinquency rate is expected to reach 4.5% in 2024, from just 2.25% in November 2023, and rise further to 4.9% in 2025.
Small and medium-sized banks outside of the top 25 in terms of assets held about 67.2% of all commercial real estate loans as of March 2023, but only about 37.6% of total loans. Commercial real estate bankruptcies are a particular threat. Those banks. Small and medium-sized banks are still reeling from the crisis that hit the sector in early 2023, with many depositors feeling safe from bank runs and resulting closures and leaving large banks alone. is escaping to.
Some developers and real estate companies have already fallen victim to the sector's debt crisis, including mortgage real estate investment trust JER Investors, which filed for bankruptcy in December. WeWork, a flexible workspace rental startup once valued at $47 billion, filed for bankruptcy in November.
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