The (CRE) National Debt – Feb. 20, 2024
2024 will represent a test of the commercial real estate financing system, not only on account of sheer volume but also given the current market circumstances. At its 2024 Commercial/Multifamily Finance Convention and Expo last week, the Mortgage Bankers Association (MBA) released the results of the 2023 Commercial Real Estate Survey of Loan Maturity Volumes.
Those results were eye-popping in numerous respects. One of them is the sheer size of the debt coming due: 20%, or $929 billion, of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will come due this year.
That represents a 28% increase from 2023’s $729 billion in CRE mortgage maturities and about 40% higher than originally projected for 2024. MBA’s Jamie Woodwell provided insights on why this has occurred.
“The lack of transactions and other activity last year, coupled with built-in extension options and lender and servicer flexibility, has meant that many loans that were set to mature in 2023 have been extended or otherwise modified and will now mature in 2024, 2026, 2028 or in other coming years,” said Woodwell, head of commercial real estate research at MBA. “These extensions and modifications have pushed the amount of CRE mortgages maturing this year from $659 billion to $929 billion.”
He continued, “Commercial mortgages tend to be relatively long-lived, spreading maturities out over several years. Volatility and uncertainty around interest rates, a lack of clarity on property values, and questions about some property fundamentals have suppressed sales and financing transactions. This year’s maturities, coupled with greater clarity in those and other areas, should begin to break the logjam in the markets.”
Another eye-opener is the varying maturity volume by lending type and property type, measured as unpaid principal balance as of Dec. 31, 2023. Just 3%, or $28 billion, of the outstanding balance of multifamily and healthcare mortgages held or guaranteed by Fannie Mae, Freddie Mac, FHA and Ginnie Mae will mature in 2024. Life insurance companies will see 8% ($59 billion) of their outstanding mortgage balances mature in 2024.
Conversely, $441 billion (25%) of the outstanding balance of mortgages held by depositories, $234 billion (31%) in CMBS, CLOs or other ABS and $168 billion (36%) of the mortgages held by credit companies, in warehouse or by other lenders are slated to mature this year.
By property type, 12% of mortgages backed by multifamily properties will mature in 2024, and likewise 17% of those backed by retail and 18% for healthcare properties. Among loans backed by office properties, 25% will come due in 2024, as will 27% of industrial loans and 38% of lodging loans.
These looming maturities occur at a time when, as the Financial Times reported, “commercial property values have already fallen steeply, and since rates are unlikely to return to previous lows any time soon, developers will still face higher refinancing costs. Meanwhile, increased remote working has hit demand. Office vacancy rates remain well above pre-pandemic levels in cities across the U.S., Europe and Asia. Loan delinquencies and distressed sales are set to climb.”
On last week’s Walker Webcast, Walker & Dunlop’s Aaron Appel wasn’t optimistic that the available debt would be enough to accommodate the volume. “There’s a lot of capital in the marketplace,” said Appel, senior managing director, capital markets at Walker & Dunlop. “The problem is that capital all wants certain types of assets and transactions and loan-to-value covenants and debt service coverage ratios and debt yields. And then those covenants really don’t work for the majority of credit.”
To paraphrase Bette Davis in All About Eve, “Fasten your safety belts. It’s going to be a bumpy year.”