Approximately $1.5 trillion of U.S. commercial real estate debt is set to mature before the end of 2025. Borrowers are already experiencing the impact of this forthcoming "debt wall" when they try to refinance or restructure their loans. Underwriting standards have tightened - even among more sophisticated lenders - and even cash-flowing properties are getting a tepid response to refinancing or loan extension requests. This climate is arguably fueled by panic; JP Morgan estimates office and retail property valuations could fall as much as 40% in the near term, increasing the risk of default. Rising inflation, high interest rates, and related pressures have created a tough environment in which to operate any business, and have led to elevated delinquency rates in the CRE. The Federal Reserve has raised interest rates 10 times between March 2022 and May 2023, which has contributed significantly to the situation. Finally, the shift towards remote work has also created problems in the office sector, with high vacancy rates.
Accordingly, lenders are afraid and refinancing risk has become a very real issue for commercial real estate owners as loans mature. The issue isn't just interest rates, but a general reluctance to lend anything to anyone.
However, some sectors of the commercial real estate market continue to perform well. Multifamily, for instance, is still somewhat strong, with a national vacancy rate of 4.5% at the end of 2022. Local bricks and mortar retail has also remained relatively healthy on a national scale. And the economy isn't completely bad - inflation increased at the lowest rate in several years. There will continue to be opportunities in commercial real estate. The key will be to navigate these changes, mitigate risk with adequate controls over those factors that can be controlled through contracts, due diligence, and regular audits, and to identify growth areas within the commercial real estate market.