Banks Face Growing Refinancing Risks as $1.5 Trillion of US Commercial Real Estate Debt Comes Due

Almost $1.5 trillion of US commercial real estate debt is due for repayment before the end of 2025, leaving borrowers wondering who will lend to them. According to a note from Morgan Stanley analysts, refinancing risks are a major concern for property owners, including those with office buildings, stores, and warehouses. The analysts predict that the maturity wall is front-loaded, and the associated risks are high. They also estimate that office and retail property valuations could fall by up to 40% from peak to trough, which could increase the risk of defaults.

Small and regional banks, which were the largest source of credit to the industry last year, have experienced deposit outflows following the demise of Silicon Valley Bank. This development has raised concerns that these banks will not be able to provide finance to borrowers. The wall of debt is set to get worse before it gets better, with maturities climbing for the next four years and peaking at $550 billion in 2027.

Banks also own more than half of the agency commercial mortgage-backed securities (CMBS), which are bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae. This fact increases their exposure to the sector, which will compound the wave of refinancing coming due.

The analysts wrote that “the role that banks have played in this ecosystem, not only as lenders but also as buyers” will increase the difficulty of refinancing coming due. Rising interest rates and concerns about defaults have already affected CMBS deals, with sales of the securities without government backing falling by about 80% in the first quarter of 2023 compared to the previous year.

Despite the bleak outlook, conservative lending standards in the wake of the financial crisis provide borrowers, and in turn their lenders, with some degree of protection from falling values. Sentiment toward multifamily housing also remains more positive as rents continue to rise. One reason why Blackstone Real Estate Income Trust had a positive return in February is that the availability of agency-backed loans will help owners of those properties when they need to refinance.

However, when apartment blocks are excluded, the scale of the problems facing banks becomes even starker. According to the report, as much as 70% of the other commercial real estate loans that mature over the next five years are held by banks. The analysts believe that “commercial real estate needs to re-price, and alternative ways to refinance the debt are needed.”

In Europe, real estate issuers have more than €24 billion due for repayment over the remainder of the year. According to Bloomberg Intelligence analyst Tolu Alamutu, real estate companies are doing everything they can to delever, including scaling back investment programs, more joint ventures, bond buybacks, and dividend cuts. Disposals are also a key focus, but some recent comments from real estate issuers suggest that it’s still not easy to sell large portfolios.

Elsewhere, investors have snapped up Europe’s first subordinated bond sale in almost a month, following the market for such debt being effectively shut by Swiss regulators’ decision to wipe out $17 billion of Credit Suisse AG’s junior notes. A global index linked to so-called contingent convertible bank bonds has also rebounded, reaching levels seen before the Credit Suisse bond writedown.

In China, capital bond issuance by city and rural commercial banks during the first three months of 2023 plunged 70% from a year earlier. This development shows that smaller banks aren’t without their own challenges. Meanwhile, China Evergrande Group, the developer at the heart of the nation’s property crisis, has signed restructuring support agreements with some dollar bondholders backing its proposed debt restructuring. Shimao Group Holdings Ltd., another Chinese builder, is circulating draft restructuring offers to advisers of an ad-hoc bondholder group.