While I do believe the CRE market is in a cyclical recession, I think statements along these lines present as sensationalist in nature.
A recent report shared by Politico headlined that the $1.5 trillion in mortgages coming due within the next three years is “a potential time bomb”. Elon Musk piled on when he tweeted that commercial real estate is “melting down fast.”
It is undeniable that the office sector has a lot to contend with, but CRE is more than the office sector. Trepp (a quality third party data provider) shows that Lodging, Retail, and Office have the highest delinquency rates (which are actively ticking up) while Multifamily and Industrial have the lowest delinquencies.
But while Office is under the spotlight, it is not the biggest borrower. According to a report by WolfStreet, the office sector makes up only about 17% of total income producing outstanding CRE loans, while Multifamily has the most exposure, making up about 44% of the loans. According to Cushman & Wakefield, office makes up only about 20% of the mix of the loans that are expiring within the next two years, while Multifamily makes up about 30%. Most of these Multifamily loans are not expected to be in distress.
Even for the Office sector, we're already starting to see that lenders are working with operators on modified loan packages, something we last saw at scale during the Global Financial Crisis. And here’s why: when a property is in distress due to reasons associated with operator error, lenders have an incentive to foreclose.
But in a market like today where the distress is macro driven, I expect that there will be a greater propensity for lenders to consider loan modifications, which can include infusions of equity and reserves, extensions of loan maturities, and other creative measures that lenders can use to help ensure those distressed properties stay off their balance sheets.
Case in point: the real estate agency RFR Realty kicked the can on a $1 billion debt package (which included a $783 million CMBS loan) on its 831K sq.ft.office tower at 375 Park Avenue in New York. More such examples continue to surface each day, and I expect this trend to continue as we dust off the “extend and pretend” strategy of the past.
So, are CRE debt maturities a “time bomb”? Not really. The way I see it, operators and lenders will continue to work together on distressed situations to determine how to defuse not one major time bomb, but a series of small incendiary devices over the next three years.
Figure: Office + Multifamily Loan Maturities Comprise ~50% - Cushman & Wakefield
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