By 2025, the US commercial real estate sector expects the repayment of around $1.5 trillion in debt from borrowers. Given the state of the economy, especially following recent scandals in the banking industry, borrowers are flummoxed as to who would be willing to lend to them and how in the world can they keep themselves from defaulting on the growing mountain of loans.
According to a recent note from analysts at investment bank Morgan Stanley, commercial property owners are facing refinancing risks left and right. As analyst James Egan puts it, the maturity wall, along with attendant risks, looms front and center.
On the same note, it was estimated that valuations on commercial, corporate, and industrial properties could drop by up to 40%, peak to trough. In turn, this could lead to more defaults on the part of borrowers.
As if this wasn’t serious enough, the recent banking fallout from the collapse of Silicon Valley Bank (SVB) has shaken small and regional banks that have long served as primary credit source for commercial real estate. Deposit outflows in the wake of the SVB crash raised valid concerns that smaller institutions could eventually be unable to issue loans to borrowers.
Worse Before It Gets Better
Analysts likewise warn that the massive amount of debt can become even bigger before issues can be resolved properly. For one thing, over the next four years, maturities are expected to peak at $550 billion.
Also, banks own over 50% of all agency commercial-backed mortgage securities (CMBS) that are supported by property loans and issued by government regulators. This increases the banking sector’s exposure to the commercial real estate scene.
The Morgan Stanley note pointed out that banks’ dual role of lender and buyer is expected to affect the massive amount of refinancing that is due soon.
CMBS deals in recent months have languished due to constantly rising interest rates as well as the looming specter of default. Also, recent reports show that the sale of non-government-backed securities dropped by 80% in the first quarter of the year.
A Glimmer of Hope
Despite the gloomy outlook, however, there is a spot of good news. Analysts say that more conservative lending standards set in place due to the current financial crisis serve as a protective buffer for both borrowers and lenders against crashing values.
Likewise, multifamily housing has begun to have greater appeal in light of increasing rent costs. For those who run apartment blocks and condominium housing, this will come as a great help should they need to refinance.