For the last two years, many lenders, brokers, analyst firms, and other experts have warned about a coming CRE debt maturity wave. JLL has sized this wave and estimates that the total due by the end of 2025 is $1.5 trillion and that about a quarter, or $375 billion, will have a hard time refinancing.
The basics have faced the industry for years now. Through the pandemic, two events happened. One, the Federal Reserve pushed an easy monetary policy to increase liquidity, and the federal government pumped rescue money into the economy, both at rates never before seen. Two, inflation quickly rose, as classical economics would suggest, and the Fed boosted interest rates to battle it.
Higher borrowing rates were a shock even though they weren’t out of keeping with historical norms. However, CRE borrowers recently experienced ultra-low rates, as Fed Chair Jerome Powell has described them. The differential was sudden and high. Transactions fell and, as a result, so did the valuations of many properties.
About 40% of the properties that need refinancing are multifamily ones, according to Fortune. Many of the owners financed their purchases using three-year floating-rate loans. It wasn’t an unusual strategy, but many using it frequently missed the addition of a hedge against rising interest rates. They had been relatively low since the aftermath of the Global Financial Crisis and many investors and developers assumed conditions would continue that way.
They got caught. Lower property values and higher interest rates ate up increased rents, undermined net operating income, and reduced the debt service coverage ratio, making the property a bad risk. There’s no telling how much of the 40% of the whole oncoming debt, which is multifamily properties, overlaps with the 25% estimated portion that faces trouble.
“A large portion of the multifamily world is underwater at the moment,” Catie McKee, director and head of commercial-mortgage-backed securities trading at Taconic Capital Advisors, told Bloomberg. “A lot of the equity is gone, but it’s an asset class that is pretty resilient over time. It’s underwritable, it just needs a capital infusion.”
Getting that capital injection may be a challenge. Matthew McAuley, research director at JLL, told the news outlet that the funding gap is $200 billion to $400 billion at present.
At the upper end, that is even larger than the estimated amount of total debt that may be in trouble.