The US commercial property market is facing a looming debt crisis, with nearly $1.5 trillion of debt set to come due for repayment by the end of 2025. Refinancing risks are at the forefront of property owners’ minds, as small and regional banks, which provided the bulk of the credit to the industry last year, have been hit by deposit outflows. 

Why Are Small Banks Being Hit?

Small and regional banks are a significant source of credit for the US commercial real estate industry, but they have been hit by deposit outflows following the collapse of Silicon Valley Bank.  This raises concerns about their ability to provide financing to borrowers, which can add to the wave of refinancing coming due. 

Banks also own huge amounts of mortgage-backed securities, creating a challenging situation for small banks in the US commercial property market.

What Changes May Come?

The commercial property market in the US is currently facing a difficult outlook due to a looming wall of debt of almost $1.5 trillion, which is expected to worsen before improving. The coming four years will see maturities climb, with a peak of $550 billion in 2027. 

Concerns over defaults and rising interest rates have already had an impact on CMBS deals, with sales of securities without government backing falling about 80% in Q1 2023 compared to the previous year. However, conservative lending standards may offer some degree of protection to borrowers and lenders.

Multifamily housing, on the other hand, could be seen more favorably as rents continue to rise and public opinion toward it remains positive. This means that more people will be able to afford homes due to the shared cost. The availability of agency-backed loans may also be helpful for owners of those properties when they need to refinance, rather than resorting to a payday loan or other high-cost measures that may cause a spiral of debt.  

Morgan Stanley analysts warn that office and retail property valuations could drop by as much as 40%, increasing the risk of defaults. Rising interest rates and concerns over defaults have already impacted commercial mortgage-backed securities deals. 

European real estate issuers are also facing repayment challenges, with the equivalent of over €24 billion due for repayment by the end of the year. In this difficult climate, real estate companies are deleveraging by scaling back investment programs, looking for joint ventures, bond buybacks, dividend cuts, and portfolio disposals.

How Are Banks Responding?

“Real estate companies are taking various steps to combat the challenges presented by the looming wall of debt in the US commercial property market,” explains Dan Kettle, founder of the financial platform, Pheabs.

“According to Bloomberg Intelligence analyst Tolu Alamutu, companies are doing all they can to deleverage. This includes scaling back investment programs, engaging in more joint ventures, buying back bonds, and cutting dividends where possible.” 

“In addition, companies are focusing on disposals, although some comments from real estate issuers suggest that selling large portfolios is still challenging. Overall, it appears that companies are taking a cautious approach and implementing various measures to reduce their debt and strengthen their financial positions in the face of this challenging market outlook.”

“Some experts advise commercial real estate companies need to re-price, and alternative ways to refinance the debt are needed. However, recent comments from real estate issuers suggest that it may still not be easy to sell large portfolios.” 

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