The Counselors of Real Estate have highlighted ten current and emerging issues significantly impacting all sectors of real estate, with high financing costs and impending loan maturities topping the list.
Despite recent cooling inflation and the Federal Reserve’s first anticipated rate cut announced in September, high financing costs continue to burden the commercial real estate market. Investors, who had hoped for as many as five rate cuts this year, are facing disappointment, which is dampening expectations for commercial properties, according to James Costello III, chief economist at MSCI Real Assets.
“Higher costs undeniably complicate the assessment of market value and the feasibility of deals,” Costello stated. “On a brighter note, the sharp decline in transaction volume seen last year is beginning to stabilize.”
Nevertheless, Costello warned that transaction volume could dip again in the third quarter, emphasizing that rate cuts alone may not stimulate deal-making.
To reignite transaction activity, both buyers and sellers must engage in the market. Currently, many owners are hesitant to sell, while buyers are cautious due to high prices, often waiting for opportunities to acquire distressed assets.
The real estate sector is struggling to address a significant amount of impending debt maturities, as noted by Constantine Korologos, clinical assistant professor and principal at New York University’s SPS Schack Real Estate Institute. Almost $1.8 trillion in commercial real estate loans are set to mature by the end of 2026, according to Trepp.
Lenders have been extending and modifying maturing debt, anticipating lower interest rates, new equity capital, or improved net operating income (NOI). However, Korologos warns that this strategy has limits.
“If, or more likely when, these extensions reach their endpoint, lenders will face a growing number of challenging loans to manage,” Korologos explained. “Banks hold a large portion of this debt and have limited options due to regulatory constraints. They can’t keep extending loans without adequate capital reserves.”
For borrowers with near-term maturities, the new debt service payments could rise by 75% to even 100% compared to their previous loans. This increase in payment obligations elevates property values and complicates refinancing efforts as values reset.
“Even if interest rates decrease as expected, it may not suffice for borrowers facing maturity balances that are too high to refinance,” he added. “This scenario is likely to lead to a shakeout among less stable operators and owners lacking sufficient capital.”
Source: GlobeSt.
