Commercial Real Estate Grapples With $1 Trillion Refinancing Tsunami In 2024, Over $200 Billion In Office Debt
A staggering $929 billion of commercial real estate (CRE) mortgages are on the brink of maturity in 2024, representing nearly a fifth of the sector’s overall $4.7 trillion debt, data from Goldman Sachs revealed Wednesday.
This critical insight comes at a time when the CRE debt market grapples with double-digit interest rates, exceeding 12%, complicating refinancing efforts for industry players.
The big question that is looming: Will the CRE sector weather the storm, or will the ticking debt time bomb detonate widespread financial spillovers?
2023: A Year of Dwindling Transactions and Rising Delinquencies
The U.S. CRE market’s transaction volumes have plummeted, with January witnessing an 11% year-over-year descent, culminating in an approximate $23 billion.
This is merely the tip of the iceberg. The full-year data for 2023 paints a dire picture, showcasing a staggering 50% tumble from the previous year.
The industries hit hardest? Office and industrial leasing, shrinking by 25% and 28% year-over-year, respectively.
“U.S. CRE transaction market continues to be muted, primarily driven by elevated interest rates, limited sources of capital, and the pricing gap between buyers and sellers,” Goldman Sachs analyst Chandni Luthra wrote in a recent study.
Breakdown of Maturing CRE Debt
The composition of the CRE debt set to mature for 2024 is diverse: 27% multifamily, 22% office, 12% industrial, 8% retail, 12% hotel, 2% healthcare and 17% categorized as other.
| Sector | Share | Amount Due ($ billion) |
|---|---|---|
| Multifamily | 27% | $250.83 |
| Office | 22% | $204.38 |
| Industrial | 12% | $111.48 |
| Retail | 8% | $74.32 |
| Hotel | 12% | $111.48 |
| Healthcare | 2% | $18.58 |
| Other | 17% | $157.93 |
Goldman Sachs highlighted that approximately a third of the commercial mortgage maturities due in 2024 were deferred from 2023 through extensions.
“It is likely that the extension volume in 2024 will be high as well,” analysts at Goldman Sachs highlighted.
However, with the expectation of declining interest rates, the demand for refinancing in 2024 is projected to exceed that of 2023, according to Goldman Sachs. It’s also probable that obtaining further extensions could become more challenging for loans that have already been deferred.
Banks hold approximately 47% of the $929 billion in CRE loans set to mature in 2024. The remaining balance is distributed among various holders, with commercial mortgage-backed securities (CMBS), likely owned by institutions and other investors, accounting for 25%; credit companies, warehouse and other for 18%; life insurance companies for 6% and government-sponsored enterprises (GSEs) making up 3%.
Office Properties Under Strain
The spotlight of distress shone glaringly on office properties, as they showed the highest delinquency rates across CRE categories.
The broader challenges faced by office properties in the current economic climate are those related to high vacancy rates and the shifting dynamics of work-from-home trends.
The 30-day delinquency rate for office CMBS has surged from 1.58% at the end of 2022 to 6.3% in January 2024, signaling increased financial pressure within the office real estate market.
ETF Feels A Slight Current
The VanEck Office And Commercial REIT ETF (NYSE:DESK) experienced an 8.8% decline since the beginning of the year. Despite this decline, significant market selling pressure has not materialized yet.
Within the ETF’s portfolio, the most underperforming stocks include Office Properties Income Trust (NASDAQ:OPI), which has seen a 61% drop year to date, Orion Office REIT Inc. (NYSE:ONL), with a 32% decrease, and Hudson Pacific Properties Inc. (NYSE:HPP), facing a 30% fall.
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