Nearly $900 billion of commercial real estate loans in the United States are due to expire in 2023 and 2024. These mortgages are coming due in a more challenging capital-markets climate, and some may have trouble refinancing due to rising borrowing rates, dropping prices, and a more risk-averse attitude among conventional sources of funding.
One study shows that more than half of the nearly $400 billion in loans due in 2023 are being funded by investor-driven lenders, commercial mortgage-backed securities (CMBS), and collateralized loan obligations (CLO). The largest single source, representing more than one-third of the outstanding sum, is CMBS lenders. Bank loans from foreign, domestic, and local/regional banks that will mature this year will make up a lower portion of loans coming due than CMBS alone.
As a result of the collapses of Silicon Valley Bank and Signature Bank, the debt markets have come into sharp focus. The turmoil exposes a precarious scenario as lenders adjust to a market with increased borrowing rates. The commercial real estate sector has presented difficulties for borrowers, since some investment activity has been stifled by increasing borrowing costs. As fewer lenders were making new loans, the rise in mortgage rates was partially a yield curve story as well as a tale about competitiveness.
In the fourth quarter of 2022 compared to the final quarter of 2021, there were 7% fewer distinct lenders participating in the market across all property sectors. The lender pool size for flat and industrial declined at double-digit rates. Some industries experienced a worse decline.
In 2022, Lender Pool Shrinks Across Most Sectors in the US
The number of active lenders increased by 21% in the hotel industry, despite the fact that this industry had previously been struck particularly hard by the pandemic, which had forced many lenders to withdraw.
In a microcosm, the commotion around the liquidation of the New York-based Signature Bank may show the difficulties the market may have if fewer lenders are engaged. In 2022, when loans for flat assets were being originated, Signature was the second-largest lender.
Due to a significant reduction in the apartment market, the decline in the price of commercial real estate in the United States widened. The National All-Property Index for the RCA fell 2.2% from January and 6.9% from a year earlier.
Of all property categories, flat prices saw the biggest yearly reduction, down 8.7% from the previous year, the worst drop for this market since 2010. Even yet, the higher-frequency change is still understated by that yearly rate of decline: When the 2.7% monthly loss is annualised, a fall of 28.2% results.
The impact on transaction activity and real estate prices has been caused by rising mortgage expenses as a result of many quick interest rate increases. Deal volume in February decreased 51% from the same month last year across all significant property types.
Industrial, Office, and Retail Sectors Experience Decline
All property types saw a decrease in pricing in February compared to January. The industrial index decreased 0.4% from January, marking the fourth month in a row with a loss. Industrial costs are still rising annually, despite a substantial decline in growth rate. Prices increased by 3.6% annually, slowing from the yearly rates of above 20% witnessed through the first half of 2022.
The index for suburban offices decreased 1.5% from a year ago and 0.7% from January. Since the end of 2010, the yearly drop for suburban offices was at its lowest level. Office rent in the core of the city decreased 0.2% from January. Relative to a year ago, retail prices decreased 2.2%. Prices dropped 1.0% for the month, which when annualised would be a decline of 11.3%.
Yearly Variation in Pricing of Commercial Properties in the US
The makeup of recent new originations provides insight into the surge of CMBS loans that are coming due. With nearly a quarter of all loan originations in 2013 and 2014, this lender group originated more loans than any other lender group. By 2016, other organisations, mostly banks, have increased their lending commitments to commercial real estate, substantially halving the market share of CMBS lenders.
Breakdown of Commercial Property Loans Set to Mature by Lender Type
The change in origination patterns is more obvious in the latter years of the maturity schedule when banks account for a larger percentage of the maturing loans. The debts that are due in 2026 and 2027 include bank lenders that are late on more than 50% of the loans.