(Bloomberg) — Landlords of offices, apartment complexes and other commercial properties have $1.5 trillion in debt coming due by the end of next year, and about a quarter of that borrowing could be difficult to refinance, according to Jones Lang LaSalle Inc.
Building values have largely fallen after higher interest rates raised financing costs for property owners. Those lower valuations make it harder for property owners to take on so much debt, forcing many owners to raise equity capital to secure new debt or expand their existing facilities.
Apartment buildings, which account for about 40% of impending maturities, are at the center of the refinancing wave, the broker says. Many U.S. owners of assets known as multifamily bought their properties using three-year floating-rate loans during the era of easy money. Interest rate increases since then have eaten up much of their rental income, making it challenging to secure additional capital.
Rising insurance costs and falling values have added to the pain, leaving about $95 billion of U.S. property in distress or at risk of distress, according to data compiled by MSCI Real Assets.
“A lot of the multifamily sector is in trouble right now,” said Catie McKee, principal and head of commercial mortgage-backed securities trading at Taconic Capital Advisors. “A lot of the capital has been lost, but it’s an asset class that’s pretty resilient over time. It’s insurable, it just needs an injection of capital.”
Looming debt maturities are also a potential headache for Wall Street, after many of the variable-rate loans were bundled into the $80 billion commercial real estate collateralized loan obligation market and sold as bonds to investors. Still, the problems in the commercial real estate market are not seen by investors as a systemic problem for the banks.
In response to higher borrowing costs, CRE CLO lenders are modifying loans to try to help keep borrowers afloat until interest rates fall, additional capital can be injected, or junior debt, such as mezzanine loans, can be secured.
As the prospects for interest rate cuts become clearer, there is optimism that large-scale difficulties in the broader commercial real estate market can be avoided.
The number of lenders submitting quotes for debt refinancings has doubled on average this year, said Matthew McAuley, research director at JLL, who said the funding gap is currently $200 billion to $400 billion.
While some traditional lenders are focused on resolving their problem loans, other banks, life insurers and direct lenders are willing to extend more credit, he said.
“This has been a tighter cycle,” McAuley added. “Banks don’t want to take on assets if they can put a new business plan in place and get an exit.”
As a result, debt funds may find fewer opportunities to invest capital than expected, said Willy Walker, chief executive of Walker & Dunlop Inc.
“The cycle has healed to the point that CMBS are coming back, agencies are coming back and banks have started lending again in commercial real estate,” he said on a video call with reporters earlier this month.
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