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Commercial real estate debt delinquency rates continue to rise with the office sector playing a particularly strong role as its constituents work through bank portfolios, says S&P Global.

The overall delinquency ratio for those loans increased quarter-over-quarter 16-basis points to 1.450%. That came from higher interest rates making refinances more difficult to obtain. The problems are concentrated in the office sector, according to this S&P analysis. However, the firm did say that there is a “sharp decline in medium-term interest rates as Federal Reserve cuts near stands to provide some relief.”

Absent some disastrous surprise in inflation or the labor market, the Fed has already signaled that it will start cutting rates this month. But a sharp decline in any interest rates is far less in focus. Chances are that the September cut to the federal funds rate — the range at which depository institutions will lend to one another overnight without collateral — will be 25 basis points. It might go as high as 50 basis points, but that seems less likely.

When the Fed is done cutting, the total will probably be between 100 and 200 basis points, or somewhere between 3% and 4%. That would be much higher than the relative peak of 2.42% in April 2019. S&P Global recently noted,maturing mortgage rates have been on average 4.3%. Add whatever spread will be in fashion, and some sources have speculated that lenders will trend toward the broader after recent experiences in being caught by inflation — and it may be that wherever Fed rates eventually land, the prevailing CRE interest rates may not be that much more attractive than today.

In conjunction with this, S&P Global noted that the year-over-year growth of bank CRE lending was 2.9% in the first quarter of 2024 and 2.2% in the second quarter. In the third quarter of 2022, it was 12.1%. This shows how much depository institutions have pulled back as well as the degree to which property values have fallen, as the growth in lending is measured in dollars, not in property counts.

The number of banks that exceed 2006 CRE loan concentration guidance has been falling, from 577 in the first quarter of 2023 to 482 in 2024 Q4. The 20 banks with the largest CRE portfolios saw CRE loan totals dropping by a median of 2.1% year over year. There were declines in 12 of them.

It’s been a week of difficult news about long-anticipated waves of CRE mortgage maturities.JLL estimated $1.5 trillion in maturing debt by the end of 2025, roughly 25% of which faces refinancing challenges. About 40% of those properties needing refinancing are multifamily units, meaning that a focus on office as the risky area may not address enough. S&P Global has forecast maturity waves a few yearsout: $946 billion in 2024, $998 billion in 2025, $1.148 trillion in 2026, $1.257 trillion in 2027, and $1.138 trillion in 2028.

While the concept of a maturity wall has been a topic for discussion, it is moving toward a point of practical implications. Such growing pressures mean there is only so long that borrowers can outlast financing costs they can’t afford, and lenders can delay dealing with defaults.

 

Source:  GlobeSt.