Note: This is the second in a series of Weekender articles about upcoming commercial real estate debt maturities and their impact on commercial real estate. The first article in this series, “Anticipating the Debt Maturity Onslaught,” was published on March 16, 2023. Over the next few weeks, experts will discuss other information related to this topic.
But suggesting that all commercial real estate product types might be in the debt maturity crosshairs fails to consider the varied asset types, geographic locations and even types of debt that might be in trouble. Or not, as the case may be.
Office, Office . . . and Office
Perhaps unsurprisingly, experts told Connect CRE that office properties tend to be the poster child when it comes to debt maturity issues. There are many reasons for this, including leasing challenges in the post-COVID environment.
“The underlying issue is the remaining hybrid work schedules,” said Yonah Sturmwind, Alliant Credit Union’s Commercial Lending Specialist Originator. “Many companies are over-leased. They might end up reducing footprints to accommodate the hybrid work models that are here to stay.”
This, in turn, is putting downward pressure on occupancies. But increasing vacancies aren’t just creating headaches for office landlords and owners. Low utilization is also coming to the attention of lenders.
“One of the most widely used metrics when underwriting the office class is utilization,” Sturmwind said. “This wasn’t always a key underwriting element in the past, but has jumped ahead in lender analysis.” The result of this? “Even if a tenant has a long-term space, lack of utilization makes it hard for a new lender to be comfortable with the loan,” Sturmwind said.
Compounding the issue is that not all office properties are created equal. But which office properties might be facing the most trouble depends on who you talk to. Bandon Capital Advisors Principal Bryan Kenny said that urban-core office buildings are more likely to be in trouble than their suburban counterparts. “Office workers will not return to major urban CBDs after the cultural shift to remote work, especially if those urban centers are dealing with higher crime,” he said.
But there are variations between even the downtown office buildings. “Buildings and markets with newer, amenity rich boutique properties—such as Chicago’s Fulton Market—are flourishing,” according to Ben Kadish, president, Maverick Commercial Mortgage. “Other submarkets in the Chicago Central Business District and suburban submarkets remain very challenged.”
About Multifamily . . .
Then there is the seeming darling asset class of investors – multifamily. Even as renter demand continues for this product type, owners and investors in this product type could experience problems with maturing debt. “The volume of multifamily debt is two times the size of the commercial market and four times the size of the industrial segment,” said iBorrow CEO Brian Good.
He went on to explain that in recent years, the trend has been for bullish multifamily investors to use floating-rate debt to buy properties at lower cap rates. The idea would be to fix up the properties and lease them at higher rental rates. “The music has completely stopped on that model as debt payments have materially increased,” Good said. “Those property owners are now stuck.”
Multifamily owners carrying bridge loans are also likely to face challenges, Kadish added. “These are nearing maturity because of the higher numbers of recent new deliveries,” he said, adding that this has bumped up the volume of debt that will require financing. “The sector carries many more short-term bridge loans, issued at rates that are half of today’s rates,” Kadish added. “They required a lot less equity than will be required to refinance in 2023.”
Beyond the Bridge
The experts also indicated that the debt maturity issue doesn’t just involve asset type. Certain loan types might be more vulnerable to debt maturity challenges than others. Kadish noted, above, that maturing bridge loans might be problematic. Also mentioned frequently are Commercial Mortgage-Backed Securities. And getting back to the office segment, many of those maturing loans are held by CMBS.
“This will result in different dynamics for the borrower and the property than, say, a multifamily property with a commercial loan from a local bank that is maturing and needs to be financed,” according to iBorrow’s Good.
But not all CMBS loans might be problematic in the coming years. Kadish explained that 10-year CMBS loans issued in 2013 across all commercial property sectors were refinanced before interest rates began to rise. That debt is “now safely refinanced with low-cost, fixed-rate debt,” he added.
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