Despite market uncertainties about the current state of commercial real estate, the tone at the Mortgage Bankers Association (MBA) CREF conference this year was one of optimism.
“It’s important to put the news in context,” said Jamie Woodwell, vice president of research and economics for the MBA, delivering a post-conference update in a webinar hosted by the Counselors of Real Estate. “The mix of capital sources for commercial real estate and the types of property they service is not monolithic.”
For example, of the $4.7 trillion in outstanding loans, about $2.1 trillion is for multifamily properties. The largest capital source for multifamily properties is GSE/FHA loans, followed by banks. Office debt totals about $700 billion.
“An important theme that came out of the convention sessions is that broad brushstrokes don’t apply to commercial real estate,” Woodwell said.
Busting the “Maturity Wall” Myth
News stories that warn about the coming deluge of loan maturities have been around for a few years, said Victor Calanog, managing director and global head of research and strategy for Manulife Investment Management.
“The real story is that the market seems to be adapting to maturing loans with extensions and modifications,” Calanog said.
Approximately $930 billion of CRE debt – about 20% of total CRE debt – has a maturity date in 2024, Woodwell said. Less than $600 billion in CRE debt matures in 2025.
“The debt that matures this year is primarily owned by banks and CMBS, with less of it owned by the GSEs and life insurance companies,” Woodwell said. “A lot of the loans have built-in extension clauses or lenders can make modifications, so those maturity dates may get pushed out farther.”
In 2023, more than $200 billion in loans had maturity dates extended into 2024 to give borrowers more time, Woodwell said.
“I’m a little more skeptical of the modifications or extensions with sponsors or borrowers coming up with cash,” said Lonnie Hendry, senior vice president for Trepp, Inc., a provider of information and data analytics for structured finance, CRE and banking markets. “If interest rates persist at a higher level, cap rates are unknown and vacancy rates are high, particularly for offices, then extensions may not make sense. 'Extend and pretend’ worked after 2008 because rates were pushed aggressively low, but it’s not the same now.”
However, Woodwell said that a variety of solutions are being worked out for debt that matures in this high-rate environment.
“Every property is different from another, every lender is different, and every deal is unique,” he said. “Owners, lenders and servicers are all taking this one deal at a time.”
In addition, Woodwell pointed out, there are plenty of owners with long-term fixed-rate debt who have 10 or more years to maturity.
Opportunities in CRE
The availability of capital and the decline in CRE transaction volume in 2023 led to chatter among participants at the MBA convention about expectations for good deals to be done in 2024, Calanog said.
“There’s hope of an increase of 30% to 35% in transaction volume in 2024 compared to 2023 and maybe 25% or 30% more CMBS issuance,” he said. “But before that happens, we need to see some stability in rates and some repricing so sellers who have to sell now recognize that they can’t benchmark their property against 2021.”
Hendry said a recurring theme at the convention is the resiliency of the CRE market.
“Many people are taking an opportunistic approach to 2024,” Hendry said. “Volumes and transactions were down in 2023, but people recognize that 2021 was an outlier and so were the first three quarters of 2022. The sentiment is that the market hasn’t fallen apart.”
Hendry pointed out that rent growth of 1% is not negative rent growth and a rent growth of 1% in markets with plenty of new supply is positive.
“People are leaning into hyperlocal opportunities in markets with solid fundamentals and continued in-migration,” Hendry said. “There’s capital available, we just need to see the bid-ask spread come together as people need to deploy capital.”
Challenges for CRE Markets
The biggest challenge is the volatility of rates, Woodwell said.
“With the 10-year bouncing around, it makes it hard for people to know when it’s the right time to act,” he said. “Some people are holding back because they thought rates would come down.”
The other major challenge is determining whether office values have hit bottom, Hendry said.
“There are some signs that Los Angeles, San Francisco and Chicago have possibly bottomed out, with values down from $1,000 per square foot to $250 per square foot, but we’re not seeing that at scale everywhere,” Hendry said. “The best-case scenario is that extensions on these properties can work out, but the worst-case scenario is that regulatory agencies would step in, reserves would need to go up and there would be forced sales at scale.”
However, many properties are fundamentally fine, so the important thing is to interpret data cautiously and look at information on a property-by-property basis, he said.