No Quick Fix for CRE Refinancing Woes as Market Resets

Many property owners who face refinancing difficulties have hoped that changing economic and market conditions would save them. Either interest rates would get cut enough and fast enough to offer better options or rising property values would effectively return enough leverage to spring past problems.

Landlords should not hang on to the former if recent markets by Fed Chair Jerome Powell are any indication. “Ultimately, we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”

That leaves waiting for valuations to climb sufficiently. Blackstone President Jonathan Gray in an interview with the Financial Times has undercut that argument. He believes the commercial property market has finally hit bottom, which should mean that property values are rising.

That said, many property owners bought at an inopportune combination of timing, asset prices, and low interest rates that made investments seem better than time would prove. Recent experience had suggested interest rates wouldn’t suddenly climb, deals could be refinanced, high leverage would be available, and property valuations could only increase. The deals that came though close to the time of the interest rate climb wound up in an untenable position, as GlobeSt.com has previously reported.

“When rates fall below some sort of long-term natural rate — which they did after Covid — pricing that in as a more permanent state of affairs can be riskier,” Gray told the FT. “There are still deals that have too much leverage, particularly office deals.”

Gray’s point is that some percentage of those people and institutions haven’t formally recognized the fallen values, particularly with office properties. Not that the devaluation process is continuing in earnest, but rather that it has already happened and normal legal and business processes haven’t yet finished.

“It’s a little bit of separating the storm from the wreckage, which takes some time to work its way through the system,” he said.

Increasingly, others in CRE have said the same, like Moody’s in August saying that the office market might be near the bottom, but that it could take another two years to complete.