A $1.5 Trillion Wall of Debt Is Looming for US Commercial Properties
The comments below are an edited and abridged synopsis of an article by Neil Callanan
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’s going to lend to them?
Estimates are that office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.
In addition, small and regional banks—the biggest source of credit to the industry last year—have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers.
The wall of debt will get worse before it gets better. Maturities climb for the coming four years, peaking at $550 billion in 2027. Banks also own more than half of the agency commercial mortgage-backed securities—bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae—increasing their exposure to the sector.
Rising interest rates and worries about defaults have already hurt CMBS deals. Sales of the securities without government backing fell about 80% in the first quarter from a year earlier.
There is some good news: Conservative lending standards in the wake of the financial crisis provide borrowers, and in turn their lenders, with some degree of protection from falling values.
Sentiment toward multifamily housing is more positive as rents continue to rise. The availability of agency-backed loans will help owners of those properties when they need to refinance.
Still, when apartment blocks are excluded, the scale of the problems facing banks becomes even starker. As much as 70% of the other commercial real estate loans that mature over the next five years are held by banks.