$2 Trillion in Commercial Debt is Coming Due—What Does That Mean for the Industry?

commercial real estate The past few years have been tough, and it doesn’t seem like things are going to get better anytime soon. Defaults may increase in this sector as rising interest rates increase refinancing costs.

And with $2.8 trillion in payments due between now and 2028, more landlords may be feeling the pinch.according to data company trep, Commercial debt maturities are expected to rise in the coming years. Many loans have been extended or refinanced, but the clock is ticking slowly for the CRE sector as those extension deadlines approach.

Worst commercial recession in 50 years

The CRE market has struggled to regain its footing since the pandemic began, especially in office space. When the pandemic hit, many office spaces became vacant, forcing landlords to make deals that delayed payments until things improved.

Unfortunately for those investing in the office sector, Remote and hybrid working is now the norm, with many companies downsizing their office space or going completely remote.

Now that CRE debt is due, landlords are starting to get upset. Due to the structure of commercial mortgages, when the debt matures, the principal must be repaid in full or refinanced.

This resulted in the following happening: Sharpest decline in commercial real estate prices in 50 yearsAccording to a group of economists from the International Monetary Fund (IMF). According to the IMF, this is mainly due to higher interest rates, a sharp tightening of monetary policy and stricter bank lending standards.

The office sector has been hit the hardest, but the overall market has been hurt by the downturn in the CRE market in recent years.vacancy rate of housing complex Rent growth is expected to decline next year, according to the. CBRE. Industrial land is also showing signs of decline.

The only bright spot in CRE is retail sectorThat’s because strong consumer spending and migration to the suburbs are driving demand for outdoor shopping centers.

Interest rates are not falling fast enough

Interest rates have come down a bit, but that may not be enough.according to wall street journalMany borrowers refinance at higher interest rates than when they originally took out their loan.

The Fed is under pressure to cut interest rates some economists It expects the rate to fall to 3.75-4% by the end of the year, and to continue lowering until it reaches 1.75-2% by the first half of 2026. However, this may not be fast enough for the CRE sector. Fitch rating expects commercial real estate delinquency rates to rise to 4.5% this year, but regulators are concerned about the knock-on effects.

In the 2023 annual report, Financial Stability Oversight Council (FSOC) cited commercial real estate exposure as a concern for financial institutions and said they needed a better understanding of the risks. Nearly 50% of CRE’s outstanding debt is held by banks.

“Accumulating losses from CRE loan portfolios can have ripple effects through the broader financial system. Sales of financially distressed properties…could lead to further downward spirals in CRE ratings,” the FSOC said. stated in the report.

Final point for real estate investors

Commercial real estate investors need to be well prepared for the challenging years ahead. That said, although the CRE space is under pressure, there is still time for landlords to negotiate. Still, CRE sales are also under pressure, causing property values ​​to fall and making it difficult for lenders and borrowers to agree on what their properties should be worth.

Increasing risk aversion by banks and increased regulatory scrutiny regarding CRE could open opportunities for non-bank financial institutions, including: private credit And for some smart investors, stress in the CRE market could present an opportunity.

In other words, if investors are prepared to weather the uncertainty of the next few years, there may be a chance to find distressed properties at high prices. However, finding these bargains requires a lot of due diligence to avoid falling into value traps.

Real estate investors need to be sure scrutinize Every opportunity that presents itself. While there are certainly some opportunities to rehabilitate properties, not all cheap properties are worth the long-term price tag.

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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.