Statistics paint a rather stark picture of the levels of maturing debt for commercial real estate properties over the next few years. Despite differing opinions, current estimates are in the neighborhood of $2 trillion in the aggregate. Furthermore, commercial mortgage-backed securities (CMBS) distress increased to their highest levels since the pandemic and for the 10th consecutive month, according to Trepp and Cred iQ.
As big as those numbers are, and as daunting as they may be, an owner’s situation should be viewed one portfolio at a time. There are vast differences in trending fundamentals for real estate asset classes. Multifamily properties may have the greatest level of debt maturities on the horizon, that’s an understandable fact given the level of development that has occurred over the last three years fueled by increased demand and zero interest rate programs. But multifamily housing is among the most necessary assets: everyone needs a place to live!
On the other hand, loan issues for office properties may be more difficult to resolve given the profound, pandemic-induced shift in workplace strategies which has had a significant impact on demand.
For many owners, the current real estate and economic landscape represent a liquidity crisis where the likeliest of potential solutions range from walking away to refinancing to keeping fingers crossed.
Some of the best advice for property owners, especially those with loan maturities that are further out, is to engage with lenders as soon as possible and treat them as your partner. Negotiations on terms and options are easier when the lender has a comprehensive understanding of the situation as it occurs in real time, rather the first communication coming as the debt is set to mature.
Lenders loan money. Owning and managing assets, especially those that are distressed, is their option of last resort. As underwriting standards have changed given the current environment, lenders prefer a well-thought-out plan that likely will require a cash infusion made by the owner, or some type of preferred equity.
Because of lenders’ preferences to “loan not own,” they likely are motivated to negotiate—within reason and when they have been kept informed of situations and conditions that arise.
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