Landlords face struggles as they navigate rising costs and shrinking equity
Landlords face the challenge of refinancing $1.5 trillion in commercial real estate debt that is set to mature by the end of next year. This looming deadline is particularly pressing for owners of multifamily properties, who are struggling with rising interest rates, declining property values, and increased costs.
About a quarter of this massive debt load could be difficult to refinance, according to Jones Lang LaSalle (JLL). The multifamily sector, which accounts for roughly 40% of the upcoming debt maturities, is feeling the most pressure.
Many landlords had taken out floating-rate loans during the low-interest era, only to see their costs soar as rates have more than doubled since.
The situation is further complicated by rising insurance costs and declining property values. According to MSCI Real Assets, about $95 billion worth of US multifamily properties are currently in distress or at risk of becoming distressed.
This looming debt crisis poses a potential challenge for Wall Street as well, given that many of the floating-rate loans have been bundled into the $80 billion commercial real estate collateralized loan obligation (CRE CLO) market and sold as bonds to investors.
Despite these concerns, investors do not view the commercial real estate market troubles as a systemic risk to the banking sector.
“A large portion of the multifamily world is underwater at the moment,” said Catie McKee, director and head of commercial-mortgage backed securities trading at Taconic Capital Advisors.
While a lot of the equity is gone, McKee said multifamily properties still hold value over time and can recover with the right financial support.
“It’s underwritable, it just needs a capital infusion,” she told Bloomberg.
In response to the rising borrowing costs, CRE CLO lenders are actively modifying loans to help borrowers stay afloat. These efforts are aimed at keeping borrowers solvent until interest rates decrease, new equity can be injected, or additional junior debt, such as mezzanine loans, can be secured.
Read more: Commercial mortgage lending poised for growth after two-year lull
JLL research director Matthew McAuley noted that the number of lenders offering refinancing quotes has doubled on average this year. He estimates the current funding gap to be between $200 billion and $400 billion.
“It’s been a more constrained cycle this time around,” McAuley said. “Banks don’t want to take over assets if they can put a new business plan in place and get an exit.”
Walker & Dunlop CEO Willy Walker agreed, noting that the commercial mortgage-backed securities (CMBS) market and other lending channels are beginning to show signs of recovery.
“The cycle has healed to the point of CMBS coming back, the agencies are coming back, and banks have started to lend back into commercial real estate,” Walker said.
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