Commercial Real Estate Debt Maturities: A Certainty. How Bad? It Depends

There have been plenty of reports and articles discussing upcoming commercial real estate debt maturities. The main focus of these write-ups have focused on the office sector.

A recent white paper released by CommercialEdge indicated that “conditions are ripe for a spike in commercial mortgage delinquencies” due to rising interest rates, lender cut backs and weaker property fundamentals. Basically, “the market is bracing itself for a wave of distress,” the white paper pointed out.

One indication debt issues is that the percentage of CMBS loans in special servicing closed out April 2023 at 5.6%. Citing data from Trepp, the paper noted that the metric was down from the 10.5% during the height of the pandemic, but twice the 2.7% pre-pandemic level.

CRE Debt Maturity by Sector

The white paper indicated that loans on 15.6% of office properties nationwide will reach maturity by 2025. And perhaps somewhat surprisingly, the report indicated that that 13.5% of industrial property loans will also reach maturity between 2023 and 2025.

“Every property type has maturing loans,” Yardi Matrix Director of U.S. Research Paul Fiorilla told Connect CRE. “One of the main points of the (white paper) is that defaults are much different among property types, and that future distress will vary, depending on the sector fundamentals.” He said that given the weak demand and high vacancies in the office sector, distress is high. Meanwhile, “industrial demand and rents are strong, so the likelihood of distress is much lower,” Fiorilla added.

Maturing Loans: Impact by Geography

The white paper also pointed out that the number of maturing office and industrial commercial real estate loans varies by region. For example:

• By total square feet, Atlanta and Chicago are among the top five markets with the highest number of maturing industrial and industrial loans.

• Los Angeles ranks among the top U.S. markets where a significant percentage of its office loans (20.1%, to be precise) will mature between 2025.

• On a percentage-of-stock basis, Columbus, OH leads the 25 top U.S. markets, with 24.7% of its industrial inventory subject to maturing loans by 2025.

“The point here is that distress won’t be monolithic throughout the industry,” Fiorilla explained. “Markets with growing demand and strong fundamentals – like Dallas and Miami – will have less distress than submarkets with weak demand, such as downtown San Francisco.”

Fiorella also put to rest any concerns that today’s scenario is in any way comparable to the massive waves of defaults and delinquencies that were the hallmark of the Great Financial Crisis. He said that demand for apartment, industrial and self-storage remains healthy.

Additionally, banks didn’t lend as aggressively in the current cycle as in the 2005-2007 period. “At that time, there were a spate of acquisitions financed with 90%-plus leverage and optimistic rent-growth assumptions,” he said.