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Banks will have to cut their exposure to commercial real estate because of a $2tn “wall” of property debt coming due in the next three years, according to a leading US brokerage.
“Banks will be under pressure,” said Barry Gosin, chief executive of Newmark, which handled $50bn of loan sales for failed Signature Bank.
Post-financial crisis regulation meant some lenders would need “to liquidate their loans or find other ways to reduce their weight in real estate”, he added, whether by syndicating the debt, doing risk transfer deals — where other investors agree to take on the risk of losses — or ceasing new lending to the sector.
Newmark, a real estate advisory and brokerage company, said the estimated $2tn of US commercial real estate debt maturing between this year and 2026 would have to be refinanced at much higher interest rates.
According to US Mortgage Bankers Association data provided by Newmark, $929bn of commercial real estate debt will need to be repaid or refinanced this year alone.
“We are at the beginning of the impact of this wall of loans,” said Gosin, who has led Newmark for four decades. “A chunk of those will be fully underwater, a chunk of those will be snorkelling and a chunk [will be recapitalised with] more equity.”
The company estimates that $670bn of the loans maturing by 2026 are “potentially troubled”. Real estate investors have been hit by rising interest rates, which have increased their financing costs and pushed down property values.
The main trouble spots in the US commercial property market are offices and “multi-family” residential apartment blocks — where some operators overexpanded using cheap debt and have been hit by higher running costs.
“Anyone who has invested heavily in office [property] in the last five years will have a problem,” said Gosin.
Since the rise of working from home during the coronavirus pandemic, US offices were “under demolished”, he said, with too many undesirable old buildings. Although there was demand for the best buildings, Gosin estimated that 50mn sq ft of office space “should be taken down” in New York City alone.
Strains in the real estate market have put pressure on the banks that provided cheap loans in the boom years. Selling the loans, sometimes at a discount, is a solution for some who have too much real estate on their books.
For buyers, including wealthy individuals and private equity debt funds, these sales are an opportunity to snap up loans or gain control of the underlying assets at depressed prices.
Patrick Arangio, vice-chair of CBRE’s loan sales business, said the volume of upcoming maturities was higher partly because of short-term extensions given between 2020 and 2023 as a result of the pandemic, the war in Ukraine and uncertainty about interest rates.
He said: “The sheer volume of loans requiring resolution in this relatively short period of time will lead to an elevated amount of loan sale product in the market in the near term and for some time to follow.”
Meanwhile, the market for the underlying properties has stalled because of the gap between bargain-hunting buyers and sellers unwilling to crystallise losses. Commercial real estate deal volumes were down 51 per cent last year in the US, according to MSCI.
“We’ve hit bottom,” said Gosin, who expected that 2024 would be “a transition year from the bottom . . . to moderate activity” but it would not be “full throttle”.