


The risk of default in the commercial real estate market is growing as office and retail property valuations could drop by as much as 40% while nearly $1.5 trillion in debt is due for repayment by the end of 2025, according to analysts at investment banking giant Morgan Stanley.
The recent banking failures are complicating matters even further as small and regional banks, who have traditionally extended lines of credit to the $20 trillion commercial real estate sector, have seen large outflows due to the collapse of failed lenders Silicon Valley Bank and Signature Bank of New York.
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“Refinancing risks are front and center” for commercial property owners, according to a note written last week by Morgan Stanley analysts and cited over the weekend by Bloomberg News.
“The maturity wall here is front-loaded. So are the associated risks.”
Morgan Stanley analysts note that the debt will keep piling on beyond 2025.
Over the next four years, commercial real estate properties must pay off debt maturities that will peak at $550 billion in 2027.
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Not only do banks lend to commercial real estate entities, but they are also purchasers of commercial mortgage-backed securities, or bonds that are supported by property loans and backed by the federal government.
Morgan Stanley analysts estimate that banks hold as much as 70% of commercial real estate loans that mature over the next five years.
The value of commercial real estate is plummeting as remote work, which was introduced as a necessity during the pandemic, persists in large parts of the country.
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Commercial real estate values fell by 15% in March in the US, according to data provider Green Street.
The lower valuation was exacerbated by continued hybrid work as well as high interest rates, according to CNN.
“You have fundamentals under pressure from work from home at a time when lending is less available than [it has been] over the last decade,” Rich Hill, head of real estate strategy at Cohen & Steers, told CNN.
“Those two factors will lead to a pretty significant decline in valuations.”
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Hill predicted that commercial property values could plummet by as much as 30% this year, making refinancing much more difficult for property owners who will likely be asked by banks to put up more equity.
This could have disastrous consequences for the banking sector.
Signature Bank of New York had the 10th largest portfolio of commercial real estate loans in the US at the start of the year, according to data firm Trepp.
Some $270 billion in commercial real estate loans held by banks are set to mature in 2023, according to Trepp.
About a third — or $80 billion — are on office properties.