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Rough Road Ahead – Jan. 8, 2024

Highway signs exist in varying degrees of usefulness to people behind the wheels of motor vehicles. At the one extreme are tiny signs providing the first and only notice of an exit just as that exit comes up (not uncommon if you happen to live in New Jersey). 

Moving toward the other end of the spectrum are signs that, if they don’t provide you with actionable information about alternative routes, at least let you know what to expect. An example of this kind of sign is the one advising “Rough Road Ahead.” 

Fitch Ratings’ new report on the outlook for commercial real estate loan refinancing provides just such a warning. The rating agency expects U.S. CRE loan refi prospects will “materially deteriorate in 2024 relative to 2023,” leading to higher CMBS delinquency rates across all major property sectors. 
 
“We are projecting the overall U.S. CMBS delinquency rate will increase to 4.50% in 2024 and to 4.90% in 2025 from 2.25% as of November 2023, due to more maturity defaults from higher interest rates, tighter access to capital, fewer special servicing resolutions, less new issuance and increased loan modifications,” Fitch reported on Friday. 
 
More than $31.2 billion of non-defaulted and non-defeased conduit and agency loans in Fitch-rated U.S. CMBS multiborrower transactions—1,473 loans in all—are scheduled to mature in 2024, and $37.9 billion, or 2,437 loans, mature in 2025. These annual totals are higher than the $26.5 billion that matured between October 2022 and December 2023, according to Fitch. 2024’s maturing loans will be concentrated in retail, office and multifamily. 

“We applied two updated scenarios to determine whether maturing loans are able to refinance at market capitalization rates and higher interest rates relative to in-place weighted average coupons,” Fitch said in its report. “Just 46%-48% would be able to refinance in 2024, compared with a rate of 73% for loans maturing between October 2022 and December 2023. Both the office and retail sectors show sub-40% refinance rates for 2024.” 
 
Although overall refinancing activity in 2023 was better than anticipated, refinancing rates for office, multifamily and industrial progressively declined in the last six months of the year, indicating mounting challenges. Only the office sector had a worse refinance rate than projected in Fitch’s May 2023 refinancing report. 
 
About 50%, or $15.6 billion, of maturing loan volume in 2024 would be unable to refinance under either scenario. New equity from the borrower, ranging from 25% to 33% of existing debt, would be necessary to pass the refinancing thresholds. 
 
I’ve yet to see a road sign that indicates smoother pavement after a rough patch, but Fitch provides something like it. “Refinancing rates will improve in 2025 to 51%-75%, driven by lower interest rates and stabilizing macroeconomic conditions,” the report concluded. 

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 16-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 7-10 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).