Billions in CRE debt due by 2027

Commercial property owners face a steep refinancing bill in the coming year. Trepp estimates that $733.2 billion in commercial real estate loans will come due in 2027. This follows an estimated $800 billion in maturities during 2026. Current high interest rates make paying off these debts far more expensive than when the loans were originally issued.

Lonnie Hendry, chief product officer at Trepp, noted that elevated rates have made refinancing increasingly difficult. He warned that lenders are pulling back on loan extensions and modifications. This shift is likely to produce more realized distress and greater loan losses. However, it also creates a chance for investors to buy assets at lower valuations.

Richard LeFrak, executive chairman of the LeFrak Organization, described the current mood among borrowers. Speaking on a recent podcast, he said, "If I had debt, I'd be petrified." He added that the practice of extending loans without addressing underlying issues is ending. Banks are now more aggressive in selling off loans or disposing of assets.

The office and multifamily sectors are feeling the most pressure. Trepp data shows the office delinquency rate in commercial mortgage-backed securities hit 12.16% in September. While office occupancy and valuations are showing signs of recovery, the multifamily market remains in distress. Many apartment borrowers refinanced in 2021 and 2022 when rates were low. They now face rates roughly double their original costs.

Ari Rastegar, founder and CEO of Rastegar Capital, pointed out that the current wave of multifamily debt is the largest on record. Most of this debt was tied to floating rate mortgages. A bridge loan that originated at 4% two years ago might now cost 9%. This 525 basis point increase forces borrowers to inject more cash or provide more equity to satisfy lenders.

Rastegar said his firm is preparing for a major buying opportunity. He is conducting a global roadshow to connect with retail and institutional investors. The goal is to be ready to purchase assets as they become distressed. "We need to be ready to buy everything, and that's what we're preparing to do," Rastegar said.

Some borrowers are choosing cheaper, shorter-term financing to survive. This strategy pushes the problem into the future. Traditional multifamily financing typically lasts ten years. Borrowers hope that property fundamentals will improve and interest rates will drop. That outcome is not guaranteed.

Jason Morgan, co-CEO of Morgan Properties, said he is seeing some improvements in fundamentals. These changes should offset some distress, but not enough to match 2021 and 2022 valuations. He observed that transaction volume has stalled. Deals that are not under contract are falling out or being repriced by up to 10%.

Morgan agreed that maturing debt will lead to bargain pricing for buyers. He noted, however, that sellers have not yet accepted this reality. "It still hasn't been a tidal wave of new opportunities because sellers haven't, you know, come to that reality," Morgan said. He expects that shift to happen over the next few months.

The gap between seller expectations and buyer offers remains wide. Lenders are requiring more equity, and borrowers are struggling to find it. As a result, deals are moving slower. The market is waiting for sellers to adjust their pricing to match current interest rates and lower rents.