Loans Coming Due

7/24/2023

Banking sector turbulence and higher interest rates have characterized 2023. Attention is now shifting to the commercial real estate sector, which benefitted previously from easy borrowing at low rates. As interest rates have risen, some commercial real estate borrowers find themselves pinched, particularly those who have interest-only loans, which they assumed could easily be refinanced at maturity.

Higher rates have increased debt servicing costs and often reduced the value of real estate assets that serve as loan collateral. On top of that, some properties have suffered from Covid-related forces. Real estate appraisals are now at risk of being unable to support existing debt levels. The emerging picture is not pretty.

The Mortgage Bankers Association (MBA) estimates that $4.5 trillion of commercial real estate loans are outstanding, with $2.6 trillion maturing through 2027 and over $700 billion coming due this year. These numbers prompt concern for borrowers seeking to renew maturing loans in the face of higher interest rates, but the reality is more nuanced. Operational performance in sectors like multifamily has remained strong as would-be home buyers are stymied by higher down payment requirements and rising mortgage costs. Borrowers who opted for interest rate protections on their existing loans may be in a stronger position to renew.

Office space is one of the most challenged real estate sectors. The MBA reports that banks hold 45% of office loans with almost one-third of those loans maturing in 2023. Recently, both JPMorgan and Wells Fargo announced that they are setting aside additional reserves for expected commercial real estate loan losses. JPMorgan reported over $1 billion in credit loss provisions attributed to its portfolio of loans secured by office properties.

The Federal Reserve has been attuned to the challenges facing commercial real estate borrowers and lenders, especially those in certain sectors or geographies. In recent weeks, the Fed has released detailed guidance and encouraged lenders to “work constructively with borrowers†through “loan accommodations†or “loan workout arrangements†for commercial real estate loans.

An illustration of the challenges came recently when a mezzanine lender foreclosed on the Margaritaville Resort in Times Square, following a default by the developer within two years of the property’s opening. The property was scheduled for a UCC foreclosure auction in mid-July. A real estate news outlet, The Real Deal, now reports that the defaulted equity owner has made a last-ditch effort to delay the auction. Whether and when the property ends up in the hands of new equity owners remains to be seen.

Here in Atlanta, the W Hotel downtown is the latest casualty of higher debt costs and adjusted patterns of living. Once vibrant with office traffic and tourism, downtown Atlanta has slowed recently due to hybrid work and growing employer preferences for Midtown and other Atlanta office submarkets. The W Hotel’s owner has opted to turn over the hotel to its lenders along with a group of 18 other properties.

As the wave of loan maturities rolls on, expect more headlines about overleveraged or simply unlucky borrowers.

Cam Simonds