Many commercial real estate (CRE) borrowers are feeling challenged these days, due to changes in post-pandemic behavior and a larger debt service caused by higher interest rates. While these may lead to higher defaults, S&P Global Market Intelligence’s latest report, Commercial Real Estate Outlook: Weathering the Storm reports that the stress will be different across various asset classes, and could take longer to play out than many think.
Commercial Real Estate Outlook: Weathering the Storm examines how insurers, banks, and regulators are dealing with these potential stresses in the CRE market, including recent investment activity from life insurers and expectations for future loss content banks will record from the CRE segment. It also spotlights how publicly traded real estate investment trusts (REITs), which trade daily, can offer some insight into market conditions.
“Commercial real estate borrowers’ mettle will be tested over the coming year as they seek to refinance loans coming due,” said Nathan Stovall, Director of Financial Institutions Research at S&P Global Market Intelligence. “Many borrowers will find credit less available or at least significantly more expensive, leading to more defaults, particularly in the office segment, but not all CRE loans face the same fate. Any pain should not be great enough to spur deleveraging in the financial system and threaten the U.S. economy.
Key Takeaways
- Banks with elevated CRE exposure have faced scrutiny from regulators and investors: Borrowers seeking to refinance maturing credits may find it more difficult to access credit, or might encounter a significantly higher debt service due to the increase in interest rates, which will reflect in banks’ CRE books.
- Close to $1 trillion of CRE mortgages are maturing in 2024. Approximately $950 billion, in fact. This analysis of U.S. property records found that those mortgages were maturing with rates nearly 200 basis points below similar mortgages originated this year.
- Office REITs still trade at vast discounts to their estimated net asset value estimates. The good news is, valuations have improved from 2023’s low point.
- Life insurers holdings of mortgage loans have keep hitting record highs in 2024. This, even despite asset quality concerns.
Click here for more on the Commercial Real Estate Outlook: Weathering the Storm report.
