A massive $929 billion in commercial real estate (CRE) mortgages are coming due in 2024, accounting for nearly a fifth of the sector's total debt of $4.7 trillion, Goldman Sachs data showed on Wednesday.
This important insight comes at a time when the CRE debt market is facing double-digit interest rates above 12%, complicating refinancing efforts for industry participants.
The big question looming is whether the CRE sector can weather the storm or whether a debt time bomb will cause widespread financial ripple effects.
The U.S. CRE market has seen transaction volumes plummet, falling 11% year-over-year to about $23 billion in January.
And this is just the tip of the iceberg: full-year data for 2023 paints a dire picture, showing a staggering 50% drop from the previous year.
The hardest hit sectors were office leasing and industrial leasing, which contracted 25% and 28% year-over-year, respectively.
“The U.S. CRE deal market remains depressed primarily due to rising interest rates, limited capital sources and pricing differentials between buyers and sellers,” Goldman Sachs analyst Chandni Luthra said in a recent research note.
The composition of CRE debt maturing in 2024 is diverse: multifamily 27%, office 22%, industrial 12%, retail 8%, hotel 12%, healthcare 2%, and other 17%.
Sector Share Paid ($ billion) Multifamily 27% $250.83 Office 22% $204.38 Industrial 12% $111.48 Retail 8% $74.32 Hotels 12% $111.48 Healthcare 2% $18.58 Other 17% $157.93
Goldman Sachs highlighted that roughly one-third of commercial mortgages maturing in 2024 have been postponed from 2023 due to the extension.
“Extension amounts for 2024 are also likely to be higher,” Goldman Sachs analysts said.
But refinancing demand is expected to exceed 2023 in 2024 due to expected lower interest rates, according to Goldman Sachs. And for loans that have already been deferred, it could become more difficult to obtain further extensions.
Banks hold about 47% of the $929 billion in CRE loans maturing in 2024. The remaining balance is distributed among a variety of holders, with commercial mortgage-backed securities (CMBS) owned by institutions and other investors accounting for 25%, credit companies, warehousing companies and others accounting for 18%, life insurance companies accounting for 6%, and government-sponsored enterprises (GSEs) accounting for 3%.
Office properties, which had the highest delinquency rates across all CRE categories, have received the most attention for their plight.
The broader challenges facing office properties in the current economic climate relate to high vacancy rates and changing working from home trends.
The 30-day delinquency rate for office CMBS has skyrocketed from 1.58% at the end of 2022 to 6.3% in January 2024, indicating increasing financial pressures in the office real estate market.
The VanEck Office And Commercial REIT ETF (NYSE:DESK) has experienced a decline of 8.8% since the beginning of the year. Despite this decline, significant selling pressure in the market has yet to materialize.
Among the worst-performing stocks in the ETF's portfolio are Office Properties Income Trust (NASDAQ:OPI), which is down 61% so far this year, Orion Office REIT (NYSE:ONL), which is down 32%, and Hudson Pacific Properties (NYSE:HPP), which is down 30%.
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