(Bloomberg) -- Commercial-property owners face nearly $400 billion of debt maturing this year as regional bank failures threaten the industry’s biggest source of financing.
In addition, almost $500 billion of loans will come due in 2024, according to a report Wednesday from MSCI Real Assets. Landlords received about 27% of financing from local and regional banks in 2022, the biggest source of newly originated debt, the report said.
Property owners who need to refinance this year are confronting much higher borrowing costs and falling property values. This month’s collapse of Silicon Valley Bank and Signature Bank threatens to make negotiations even tougher as local lenders scramble to reduce risk.
“The turmoil we’ve seen in the last week has hit dead center in the lender group that supported more commercial mortgages in 2022 than any other,” said Jim Costello, an economist at MSCI Real Assets. “It was already happening. This is kicking a man when he’s down.”
Major US banks began scaling back their risk appetite for real estate loans in the second half of 2022 as borrowing costs climbed and regulators issued warnings about properties such as offices.
Office owners have been struggling in particular amid the squeeze from higher borrowing costs and the rise in remote work, with nearly $40 billion of those properties seen as having a higher likelihood of distress, MSCI said. Nearly a quarter of the pool of loans that mature in 2023 are linked to offices.
A slowdown by local banks because of the recent turmoil is likely to hit small businesses in markets where there are few alternative sources of financing, Costello said. The average loan from local banks was $7.6 million, compared with $14.3 million for national banks and $24.4 million for insurance companies, MSCI reported.
Bank loans maturing this year account for a smaller share of debt coming due than commercial mortgage-backed securities, according to MSCI. Banks are tied to more than 50% of the loans that will mature in 2026 and 2027.
Banks of all sizes accounted for $1.75 trillion of the total $4.5 trillion in outstanding US debt on commercial and multifamily properties at the end of 2022, the Mortgage Bankers Association reported Tuesday.
Given higher rates and an uncertain outlook, the number of commercial property deals dropped 51% in February from a year earlier to $26.9 billion, MSCI reported. Prices fell 6.9% in the 12 months through February, including an 8.7% drop for apartments.
“The trends in deal activity, pricing and credit availability were already pointing downward before the recent challenges in the banking world,” MSCI said in the report. “The events in recent weeks might be viewed as a force accelerating changes that were already underway.”
©2023 Bloomberg L.P.
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