The commercial real estate industry is staring down the barrel of a colossal debt load which may soon come due, which interest rate hikes and high vacancy rates could make harder to pay off.
As reported by the Daily Caller, roughly $2.81 trillion worth of commercial real estate loans will expire in 2028. The market research group Trepp has determined that borrowers will have to choose between paying off that amount immediately, or refinancing the debt by raising interest rates. While borrowers previously resorted to the tactic of refinancing at current rates, this course of action would lead to dramatically increased payments at a time when developers and property owners alike are struggling financially due to the ongoing inflation crisis and other economic woes.
Trepp also noted that approximately $544.3 billion in commercial real estate loans were due in 2023, which set the record for the highest amount of loans due in modern history. That amount is expected to increase rapidly in the next few years.
“Borrowers have simply been unwilling to accept reality,” said Gwen Roush, senior vice president of DBRS Morningstar. “But reality has to come due at some point.”
Commercial real estate’s interest rates are being negatively impacted by the Federal Reserve implementing hikes in the federal funds rate in order to combat inflation; after the latest hikes, the rate is currently between 5.25% and 5.50%, which is the highest it has been in 2022 years.
Meanwhile, security delinquencies as a result of commercial mortgages are expected to rise as more people become unable to pay back such loans, as reported by Fitch Ratings. The delinquency rate is projected to hit 4.5% in 2024, then rise to 4.9% in 2025. In November of 2023, the rate was just 2.25%.
As a result of being unable to pay back such loans, several developers and property firms have had no other option but to fold. In December, the mortgage real estate investment trust JER Investors filed for bankruptcy. A month prior, the start-up company WeWork, which was once valued at $47 billion and offered flexible workspace for rent, also filed for bankruptcy.