Maturities Pile Up

The amount of commercial real estate loans coming due in 2024 has jumped to $929 billion according to the Mortgage Bankers Association. Previously the amount had been estimated to be $659 billion, with the 40% increase “attributed to loan extensions and other delays rather than new transactions,” according to Bloomberg’s John Gittelesohn.

Of the nearly $1 billion in commercial-property debt maturing this year, banks hold $441 billion of it, the mortgage bankers group reported. 

With commercial-property prices down 21% from the early 2022 peak and office prices falling 35%, an estimated $85.8 billion of commercial property debt was considered distressed at the end of 2023, according to MSCI Real Assets, who believes there is an additional $234.6 billion of potential distress.

Reuters reports “investors are combing through portfolios of regional banks, as small banks account for nearly 70% of all commercial real estate (CRE) loans outstanding, according to research from Apollo.”

“As long as interest rates stay high, it's hard for the banks to avoid problems with CRE loans," said short-seller William C. Martin of Raging Capital Ventures told Reuters, who decided to place a bet against NYCB after the bank's disastrous Jan. 30 earnings release which detailed real estate pain and led him to believe that shares could sink further on more real estate losses.

"The regional banks ... (are) doubly more exposed to rates," said Dan Zwirn, co-founder and CEO of distressed debt investment firm Arena Investors, who is avoiding real estate for the next year or two, citing in part higher risk of default.

Nearly 1,900 banks with assets less than $100 billion had CRE loans outstanding greater than 300% of equity, according to Fitch.

Credit rating company Fitch, in a detailed report in December, said if commercial real estate “prices decline by approximately 40% on average, losses in CRE portfolios could result in the failure of a moderate number of predominantly smaller banks,” Reuters reported. (emphasis added)

NYCB said on Wednesday options could include loan sales and that the bank "will be razor-focused on reducing our CRE concentration."

But loan sales are unlikely with properties now valued 50%-75% below their valuations at the time loans were made. No one will buy loans at par where the underlying collateral has fallen by 25%-50%. Selling loans at a loss will generate capital-eroding losses these banks can’t afford.  For the same reason, borrowers seeking an extension for their undercollateralized loan will be asked to pay down the principal balance with cash they likely don’t have. 

"Loans that were done over the last five to seven years, a lot of those are challenged now," said Ran Eliasaf, founder and managing partner of real estate investment firm Northwind Group, who is investing in the New York multifamily market.

Real Estate investor Ken McElroy told Jeff Snider that if this real estate downturn is a baseball game it is in the 2nd or 3rd inning.

Watch this space. 

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