Wall of Commercial Real Estate Debt Comes Due, Opening Doors for Bargain Hunters

A large wave of commercial real estate debt is maturing now and across the next two years, and refinancing it at current interest rates will cost far more than many borrowers planned for. For some owners that is a serious threat. For investors with cash, it looks like a chance to buy.

Trepp estimates that $733.2 billion in commercial real estate loans will come due in 2027. Around $800 billion was expected to mature this year, though some of that was set at lower rates earlier in the year. Lonnie Hendry, chief product officer at Trepp, said elevated rates have made refinancing increasingly hard, with little relief in sight. He said lenders are pulling back on extensions and modifications, which is likely to bring more realized distress and greater loan losses, while also letting investors acquire assets at attractive valuations.

Lenders have spent the past few years giving borrowers extra time in the hope that rates would fall. That patience is fading. Richard LeFrak, executive chairman of the LeFrak Organization, said on a recent Property Play podcast: "If I had debt, I'd be petrified." He added that the "extend and pretend party is over," and that banks are becoming more aggressive about selling loans or disposing of the underlying assets.

Office and multifamily are under the most pressure. According to Trepp, the delinquency rate for office loans in commercial mortgage-backed securities reached 12.16% in September. Even so, the office market is recovering faster now, in both occupancy and valuations.

Multifamily remains in distress as it works through a recent oversupply and softer rents. Many owners refinanced their apartment buildings in 2021 and 2022, when rates were very low, and would now face rates roughly double the original ones. Ari Rastegar, founder and CEO of Rastegar Capital, said the volume of multifamily debt coming due is the largest ever, and that most of it carries floating rates. He gave the example of a bridge loan with a two-year term and two one-year extensions, originated near 4%, which now sits around 9% after a rise of 525 basis points.

Higher rates and lower rents reduce property values, so borrowers must contribute more cash and lenders will demand more equity. Some owners simply lack the cash flow to support the debt service, which creates the opening for distressed-asset buyers. Rastegar said his firm is preparing for a "massive buying opportunity" and starting a global roadshow to speak with retail and institutional investors. "We need to be ready to buy everything," he said.

Some borrowers are choosing cheaper, shorter-term financing, but that only delays the problem by a few years, since multifamily financing is traditionally meant to last ten years. The hope is that property fundamentals will improve and rates will fall, though neither is guaranteed.

Jason Morgan, co-CEO of Morgan Properties, one of the nation's largest apartment owners and managers, said fundamentals are starting to improve, but not nearly enough to restore 2021 and 2022 valuations. He said transaction volume has come to a standstill, and deals not yet under contract are falling through or being repriced by up to about 10%, anecdotally.

Morgan agreed that maturing multifamily debt will give buyers a chance to purchase at bargain prices compared with a few years ago. For now, though, it has not become a "tidal wave" of opportunities, because sellers have not yet accepted the new reality. He expects that to change over the next few months.