As shown below, the U.S. has $1.5 trillion in commercial real estate mortgage debt that matures through 2025.
Unfortunately, there are a number of impediments to successfully refinancing much of that debt which may well result in a real estate crisis.
First, banks hold close to 60% of commercial mortgages, and small and medium-size banks represent two-thirds of that total. As a result of well-publicized recent bank failures, many institutions have tightened credit standards and a large number of regionals have effectively shut off lending for the time being. Second, roughly 20% of that debt relates to the office sector which is undergoing extreme stress. Only 50%-60% of workers are back in the office which is leading many companies to contemplate reducing space requirements, and that comes on top of a national office vacancy rate that is already 17%. Particularly hard-hit has been San Francisco where the vacancy rate is almost 30%, and an office building that sold for $300 million in 2019 is expected to sell for just $60 million. The key point is that the value of many office buildings may be less than the outstanding debt. Further, many owners will be unwilling or unable to contribute more equity in order to achieve a successful refinancing. Brookfield and Blackstone, two of the nation’s premier real estate firms, recently defaulted on loans resulting in their handing the keys over to the lenders. By the way, many lenders are ill-equipped to handle property workouts which may add to the potential crisis.
Where there is distress, there is opportunity. As was the case in the Great Financial Crisis, investors with capital and expertise in workouts are likely to be able to provide rescue capital that will generate very attractive returns. Stepping up in a challenging environment requires a good bit of intestinal fortitude but courage is the source of great returns.