"Will a Bad Loan Bomb Explode?"... $117 Billion in US Commercial Real Estate Loans Maturing This Year

Loan Extension and Refinancing Hindered by High Interest Rates
CMBS Market Delinquency Rate Rises to 6%
Commercial Real Estate Crisis Raises Concerns of Spillover to Financial Sector

The scale of U.S. commercial real estate loans maturing this year is reported to reach $117 billion. There are growing concerns that if investors, struggling with high interest rates to extend or refinance their loans, flood the market, loan defaults could occur, potentially triggering a commercial real estate crisis that would materialize in the global financial market. Despite expectations of a pivot by the U.S. Federal Reserve (Fed) this year, the commercial real estate market still shows no signs of thawing.

On the 1st (local time), major foreign media outlets cited data from the U.S. Mortgage Bankers Association (MBA), reporting that the amount of loans maturing in the U.S. commercial real estate market in 2024 that need to be repaid or refinanced is $117 billion.

A significant portion of these loans were originated about 10 years ago when interest rates were much lower. As the benchmark interest rate rose from near 0% at that time to the current 5.25-5.5%, commercial real estate loan rates have doubled, while property collateral values have declined, making refinancing difficult for investors. The spread of remote work due to the COVID-19 pandemic, rising vacancy rates, and sharply increased funding costs caused by accumulated tightening have combined to cause a steep drop in current commercial real estate values. Additionally, many commercial real estate loans use a balloon payment structure, where only interest is paid regularly and the principal is repaid in full at maturity, which imposes a much heavier debt repayment burden at loan maturity compared to equal principal and interest installment methods.

Therefore, it is estimated that one out of every three U.S. commercial real estate loans will face refinancing difficulties. According to Moody's, one of the three major global credit rating agencies, among 605 commercial properties with loans maturing soon, 224 properties?about one-third?are expected to struggle with loan extensions or refinancing due to excessive debt or poor rental performance. Moody's notes that due to the impact of high interest rates, refinancing will be difficult if annual rental income does not generate an amount equivalent to 9% of the loan.

John Duncan, head of real estate finance at law firm Polsinelli, said, "Some will have trouble obtaining refinancing," adding, "Even financially sound borrowers are calling lenders to ask whether loans will be called in," reflecting the tense atmosphere.

The commercial real estate crisis is already becoming a reality. Austrian real estate company Signa recently filed for bankruptcy, and its court-appointed administrator has put the New York Chrysler Building, in which Signa owns half the equity, up for sale. This is a consequence of the commercial real estate market downturn and soaring funding costs leading to loan repayment failures.

Concerns about financial sector insolvency are also growing. Currently, two-thirds of the commercial real estate loans nearing maturity are held by banks, and the delinquency rate was relatively low at 1.5% as of the end of the third quarter last year (according to the U.S. Federal Deposit Insurance Corporation (FDIC)). However, hidden risks remain. According to estimates by U.S. economists last month, 40% of commercial real estate properties have mortgage debt exceeding their property values, meaning about half of commercial real estate investments have incurred losses.

The situation in the U.S. commercial mortgage-backed securities (CMBS) market is even bleaker. According to real estate information firm Trepp, the U.S. CMBS market, which is backed by loans secured by commercial real estate, amounts to $800 billion, with a delinquency rate of 6% as of November last year, up 4.3 percentage points from 1.7% a year earlier.

Leo Huang of hedge fund Ellington Management said, "People need to understand that regional banks are still heavily exposed to commercial real estate," adding, "The CMBS market, which played a role in risk diversification, will also bring pain."

This content was produced with the assistance of AI translation services.