Within the next 18 months, approximately $936 billion in commercial real estate and multifamily debt is due to mature. Analysts expect delinquency rates to continue to climb, as interest rates rise and traditional capital sources remain constrained. Office properties are especially vulnerable because they are facing additional challenges: declining occupancy rates and tenant demand, increased operating costs, and the substantial expense associated with re-letting space or repositioning some or all of an office building to an alternative use.
Strategies for refinancing are often property-specific, providing market participants with numerous ways to restructure or otherwise resolve underperforming properties and related senior and subordinate loans.
Moving the benchmark rate to between 5 and 5.25 percent, the Federal Reserve’s ten consecutive interest rate hikes over the course of the last year have increased borrowing costs materially—a consequence that will directly affect the ability of many projects to refinance maturing loans, even if all other factors remain positive.
However, the market for CRE sales and rentals is slower today than many CRE brokers have ever seen. Office space in particular has lost value as a result of the work-from-home arrangements established during the pandemic, which adversely affected occupancy rates, tenant demand, and, ultimately, realized rental rates. Increased operating and debt costs only worsen the math, with many properties not expected to be able to refinance their existing loans upon maturity with other properties failing before loan maturity.
Other property types have been, and will continue to be, negatively affected by the low office-utilization rates in many city centers. In particular, surrounding multifamily and retail values have been negatively affected, impacting not only the owners of multifamily units but their lenders, many of whom fed multifamily loans into collateralized loan obligations or warehouse lines of credit.
While commercial banks provided more than half of the CRE debt that will come due by the end of 2024, the small and regional banks that commonly extend credit to the CRE sector are becoming a less likely source of revenue as depositors withdraw funds in the wake of recent bank failures and commercial real estate loans are re-assessed and adjusted accordingly.
Resolution options vary and are deal specific but include:
- Consensual Waivers and Forbearances
- Condominium and Land Use Strategies
- Development Project Phasing or Repositioning
- Parcel or Unit Sales
- Loan Resizing
- Equity Kickers
- Discounted Payoffs and Note Sales
- A/B Loan Splits
- Rescue Debt and/or Equity Capital
- Tax Appeals
- Bankruptcy or Reorganization
- Tenant Claims
- Foreclosures and Deeds in Lieu
- Enforcement Actions and Guarantor Claims
Ballard Spahr is helping clients across industries, and across the country, to restructure a wide-range of CRE projects and loans, including converting properties to new uses. Our clients include some of the largest real estate lenders and investors and top special servicers and trustees. Transactions range from small balance loans to large balance, multi-tranche, multi-lender loans including large single borrower single asset (SASB) transactions and single and multi-asset bankruptcy matters. Our Distressed Office Team focuses on the specific issues involving distressed office buildings and the nuanced considerations that need to be identified and addressed in order to arrive at and to implement the best resolution plan. To learn more about our Distressed Office Team, please click here.
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