According to a top US brokerage, within the next three years, banks will be forced to reduce their involvement with commercial real estate due to a “wall” of impending property debt amounting to $2 trillion (€1.9 trillion). The CEO of Newmark, Barry Gosin, stated that banks may face difficulties in order to adhere to post-financial crisis regulations. This could involve the liquidation of their loans or other strategies to lessen their real estate holdings. Methods could include syndicating the debt, engaging in risk transfer deals, or stopping new loans to the sector entirely.
Newmark, a company focussed on advising and brokering in real estate, has projected that the impending $2 trillion of US commercial property debt, which is due for repayment between now and 2026, will most likely be refinanced at significantly increased interest rates. Based on information from the US Mortgage Bankers Association supplied by Newmark, there is an expectation that $929 billion worth of commercial real estate debt will have to be repaid or refinanced within this year alone.
Gosin, who has headed Newmark for forty years, commented, “This is just the tip of the iceberg of this wall of loans.” He anticipates that a significant portion will be entirely underwater, with some struggling while others may be recapitalised with excess equity.
Newmark’s projections conclude that by 2026, $670 billion of the maturing loans may be labelled as “potentially troubled.” Rising interest rates have presented challenges for real estate investors by escalating their financing costs and diminishing the value of their properties.
Areas of concern within the US commercial real estate industry are primarily offices and residential apartment blocks, which have been overly expanded using inexpensive debt and are now confronted with increased operating costs. Gosin warned of problems for individuals who have invested heavily into office spaces in the past five years.
As work from home culture has becoming increasingly popular during the pandemic, there is an oversupply of outdated and undesirable office spaces in the US. Gosin suggested that approximately 50 million square feet of office space should be demolished in New York City alone, despite the existing demand for premier buildings.
Tensions in the property market have put a strain on banks that made available inexpensive loans during the boom period. Some banks have found an answer in selling these loans, occasionally at a reduced price, due to an excess of real estate in their possession.
This scenario presents a golden chance for buyers, including affluent individuals and private equity debt funds, who can seize these loans or acquire ownership of the assets they’re based on, often at heavily decreased prices.
Patrick Arangio, vice-chair of CBRE’s loan sales operation, indicated that the upcoming volume of maturities will be inflated. This is partly due to short-term extensions granted between 2020 and 2023 because of factors like the pandemic, the Ukrainian conflict and doubts about interest rates.
Arangio expressed that the sheer amount of loans that need resolution in this relatively limited timeframe will likely result in a considerable volume of loan sale merchandise appearing on the market in the near future and for a while afterwards.
However, trading for the underlying properties has temporarily ceased due to the contrast between buyers keen to strike a deal and sellers who don’t wish to crystallise losses. According to MSCI, commercial property deal volumes in the United States dropped by 51 per cent during the previous year.
“We’ve reached the lowest point,” conveyed Gosin, forecasting that 2024 would be a year of transition from this low point to tempered activity, but it wouldn’t necessarily mean proceeding at full steam. – Copyright The Financial Times Limited 2024