A Potent Sign that CRE Capital Markets Are Weakening

Commercial and multifamily mortgage debt outstanding increased by $40.1 billion (0.9%) in the first quarter of 2024, according to the Mortgage Bankers Association’s (MBA) latest Commercial/Multifamily Mortgage Debt Outstanding report for the first quarter of 2024. And that’s bad news.

“The amount of commercial mortgage debt outstanding increased in the first quarter of 2024, despite slow mortgage originations activity,” Jamie Woodwell, MBA’s Head of Commercial Real Estate Research, said in prepared remarks. “Every major capital source increased its holdings of commercial mortgages, as fewer loans than usual were paid off through property sales or refinancings.”

In other words, this was accruing debt, not origination — new business that would also increase the debt load. The total increased to $4.7 trillion by the quarter’s end. Multifamily mortgage debt alone was up 1.1%, or $23.7 billion, to $2.10 trillion from the fourth quarter of 2023.

These are signs that borrowers are refinancing or paying off balances of fewer maturing mortgages than might be expected. It means many borrowers aren’t getting refinancing or can’t — or won’t — raise the capital to help pay down debt.

In theory, this shouldn’t surprise anyone in the industry. These are the results that many have been warning about in terms of the expected “wave of maturities.” Borrowers who depended on ultra-low rates, high property valuations, and heavy leverage cannot get the same terms as were available a few years ago.

Sales could help, but only if the borrowers can get enough from the proceeds to make things fiscally square. Or perhaps it’s that the current conditions leave many lenders wary of lending, making transactions harder to finance.

The signs are also bad for lenders. Someone holds these loans, with many lenders having to resort to so-called extend-and-pretend, keeping properties on the books to avoid taking a reportable loss.

“Commercial banks continue to hold the largest share (38 percent) of commercial/multifamily mortgages at $1.8 trillion,” the MBA wrote. “Agency and GSE portfolios and MBS are the second-largest holders of commercial/multifamily mortgages (22 percent) at $1.01 trillion. Life insurance companies hold $720 billion (15 percent), and CMBS, CDO and other ABS issues hold $604 billion (13 percent). Many life insurance companies, banks and the GSEs purchase and hold CMBS, CDO and other ABS issues. These loans appear in the report in the “CMBS, CDO and other ABS” category.”

Banks and thrifts, which have demonstrated the greatest vulnerability to loan weaknesses —had the biggest increase in mortgage holdings of $12.8 billion, or 0.7% increase. CMBS, CDO and other saw a $11.0 billion increase, or 1.9%. Agency, GSE, and MBS were up $10.2 billion (1.0%), and life insurance companies increased their holdings by $7.0 billion (1.0 percent).