How Big is the Wall of Maturities in Commercial Real Estate?
Banks across the U.S. are facing significant challenges as trillions in property debt are set to mature over the next few years.
Jordan B. & Han-Gwon Lung
April 03, 2024
Together with
Good morning. U.S. banks must handle $2T in property debt coming due in the next 3 years. Meanwhile, WeWork plans to keep 300 locations, renegotiating rents to save over $8B.
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Market Snapshot
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*Data as of 4/02/2024 market close.
DEBT COUNTDOWN
Just How Big is the Wall of Maturities in Commercial Real Estate?
Banks across the U.S. are facing significant challenges as trillions in property debt are set to mature over the next few years, leading to massive pressure on lenders, according to insights from Newmark.
How big is the wall? According to a new report from Newmark, there is now a $2 trillion maturity wall of CRE loans facing banks over the next three years. The multi-trillion figure highlights the immense pressure banks are expected to face. Barry Gosin, CEO of Newmark, stressed this pressure in conversation with the Financial Times, especially in light of the brokerage's recent $50B loan sales for the FDIC post-Signature Bank's failure. However, one question remains: is anyone really sure of the size of the debt?
By the numbers: CRED iQ's database revealed about $320 billion of commercial mortgages set to mature in the next 24 months, while the Mortgage Bankers Association indicated that 20% of commercial and multifamily mortgage balances, totaling approximately $929 billion, are due this year.
Seeking clarity: A deeper dive into bank portfolios, courtesy of the Federal Reserve's H.8 report, shows a total of $2,985.5 billion in commercial real estate loans held by banks as of March 2024. However, projecting a $2 trillion maturity within three years seems to overshoot,
Shedding light: GlobeSt contacted Newmark for some clarity. Newmark highlighted several key points via David Bitner.
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“The $2T figure should indeed refer to ALL CRE loans (including 5+ unit multifamily).”
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“Bank maturities are the largest share of near-term maturities, which is a large part of why we focus on them.”
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“Debt fund and CMBS/CRE CLO debt is also front-loaded.”
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“Data comes from Mortgage Bankers Association latest Loan Maturities report (released in mid-February).”
What does it mean? The portfolio of loans extends far beyond what is solely held by banks. The truth will ultimately prevail despite lenders using strategies like "extend and pretend" to delay recognizing losses on their balance sheets. Ultimately, it may be inconsequential who owns these loans. Once accounting regulations compel the disclosure of definitive losses, it will trigger a significant mark-to-market adjustment, reducing the valuation of numerous, if not all, commercial real estate loans.
➥ THE TAKEAWAY
Looking ahead: This scenario would impact the overall asset values of numerous banks, a situation that contributed to the failure of Silicon Valley Bank, First Republic Bank, and Signature Bank last year. As Gosin explained to the Financial Times, this outcome could compel some banks to either sell off their loans or seek alternative methods to diminish their real estate exposure. This might involve strategies to boost their capital, transfer the risk, or decrease the volume of their commercial real estate lending activities.
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✍️ Editor’s Picks
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Construction concerns: Construction spending fell 0.3% in February to $2091.5B, with residential construction up 0.7%, but nonresidential and public construction declining.
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Knakal meets AI: Bob Knakal launches BK Real Estate Advisors, blending an old-school CRE approach with AI to revolutionize property sales.
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Hospitality reimagined: New laws will impact NYC hospitality going forward, including short-term rental restrictions, less hotel development, and congestion pricing.
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Changing sides: Former Signature Bank executive Joseph Fingerman will lead A&E Real Estate's new lending platform in NYC with a team of 20.
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CRE turmoil: Over $900B in CRE loans due in 2024 could strain banks across the country, with the office market facing particularly serious challenges.
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Billionaire binge: Jeff Bezos added a $90 million, 6-bedroom Miami mansion to his growing real estate collection, marking his third mansion purchase in the area.
🏘️ MULTIFAMILY
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Rental trends: The average asking rent in L.A. County surged to a new high of $2,183 per unit per month, influenced largely by the addition of 2,405 new, primarily high-end units to the market.
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Syndicator scheme: Multifamily syndicator GVA allegedly secured a $56M loan without investor approval, leading to a $7M loss and foreclosure for Overwatch.
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Debt drama unfolds: Old National Bank (ONB) extends a loan for 21-story 860 North DeWitt Place multiple times as the landlord seeks new capital.
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Debt or dare: Lurra Capital buys Queue Apartments in Fort Lauderdale for $59M, assuming the seller's $33M debt at a 4% rate.
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Day of reckoning: Investors riding South Florida's multifamily boom are now grappling with rising interest rates, surging insurance costs, and stabilizing rent prices.
🏭 Industrial
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Market report: Industrial asset sale prices surged with a 9.6% quarterly increase and 2% growth annually, averaging $132PSF.
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Conversion: TGS Management plans to transform a former Cal State Fullerton campus in Irvine into a logistics hub, leveraging its quantitative finance expertise across multiple locations.
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Big buy: EQT Exeter acquired an 819,000-square-foot warehouse in Fontana from Manulife Investment Management, brokered by JLL, for $197 million, equating to $240 per square foot.
🏬 RETAIL
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Foot traffic: Unfavorable cold and rainy weather in Los Angeles has troubled beachside retail landlords, leading to fewer new restaurant and store openings along the coast.
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Diverse opportunities: Chicago's CRE market boasts a diverse economy and tenant base, with over 15 retail sectors shaping its landscape.
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Tenant top tips: These days, landlords are considering credit strength, industry trends, and types of offerings when choosing retail tenants for financial success.
🏢 OFFICE
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Small but mighty: An investor backs a $65M loan for a struggling 977.2KSF Jersey City tower to capitalize on a potential office market rebound.
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Rental reset: Savills predicts LA office rents will drop this year as office availability hits an all-time high of 27.6%.
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Cash fuel: Kuwaiti backers fund a $575M construction loan for a 730KSF office tower in Century City, set for completion by 2026.
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Denver deal: Cress Capital acquired a $113M mortgage in Denver at a major discount, focusing on U.S. office properties for investment.
REWORK DEALS
WeWork to Save $8 Billion in Rent by Restructuring Leases
WeWork said it expects to exit bankruptcy with over 20 million square feet of real estate in more than 20 countries. (Getty Images)
WeWork is on track to exit bankruptcy protection by May 31st, focusing on reshaping its real estate footprint and financial commitments to landlords.
Renegotiations: WeWork is finalizing the fate of its 450 locations, planning to retain approximately 300 company-owned sites globally. Half of these locations will undergo rent renegotiations. The company is also exiting 150 locations after rejecting leases or reaching agreements with landlords. This restructuring is expected to save over $8B in total future rent commitments.
More equity exchange: Debt holders owning the majority of WeWork's secured notes have agreed to eliminate over $3B in pre-petition secured debt obligations. These debt holders, including SoftBank, will exchange debt for equity in the company. And with little to no debt after its exiting its post-bankruptcy period, WeWork will no longer have to make interest payments, significantly improving its balance sheet.
Global optimization: WeWork is optimizing its worldwide building footprint, aiming to remain a leader in the coworking industry with over 20MSF of real estate across more than 20 countries. As part of this process, WeWork has exited Oslo, Norway, while excluding franchised or JV markets like India, Japan, and China from lease renegotiations and restructurings.
➥ THE TAKEAWAY
Path to prosperity? WeWork's relentless efforts in restructuring its lease agreements, eliminating debt, and optimizing its global real estate footprint signal a more clear path to financial stability. But given the company’s turbulent financial history, it remains to be seen whether it can execute and follow through.
📈 CHART OF THE DAY
In this forecast of retail vacancy from CoStar, the base case sees retail vacancy rates hovering slightly above 4.0%, where they are currently sitting. That’s the best-case scenario.
But if there’s a moderate downside, depression, or severe downside on the road ahead, retail vacancy rates could shoot up to 4.75%, over 5%, or as high as 5.4% before dipping back down to 5% by 2027.
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