As the Federal Reserve raises interest rates in September for the first time since 2023, commercial real estate lenders are knee-deep in a year-long scrabble for a deal.
Nearly two months later, through the bond-market sell-off, the Federal Reserve’s October pause and the midterm elections that flipped Congress, they are still on. But the field has narrowed.
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In the US, lenders take a cut of profit to get loans on stable and flowing properties. Go outside that circle and money gets tighter and more expensive, especially for owners of office buildings, apartment complexes with floating-rate loans, and anything else with maturing debt at interest rates hundreds of basis points below the current market.
The owner has run out of time. Over the next 12 months, office and apartment loans alone that have run out of extensions face a combined refinancing gap of nearly $19B, according to estimates Trepp shared exclusively with Bisnow.
About $16.5B of office loans packaged into CMBS hit that deadline. Trepp assumes that owners will pay back at a 7% interest rate, close to what new commercial mortgages cost today. At that rate, more than a third of those loans cannot be refinanced unless the owner writes a check to cover the difference, which amounts to about $1.9B.
The apartment faces a larger wall. About $160B of apartment loans mature next year, and about 43% of those loans cannot be refinanced at current rates without more cash, a gap of about $17B.
Banks own about $84B of these apartment loans and typically exceed half of what they owe, which Trepp estimates will reduce the bank borrower gap to about $5B to $11B.
‘Food Fight’
At the top of the market, it’s a different story.
Lenders are in a “food war for the best loans, the strongest collateral,” said Stephen Buschbom, head of applied research and analytics at New York-based Trepp, which tracks the loan-to-loan CMBS market.
The competition is driving low credit margins.
“So what happens when you have more competition fighting for a low bid? The spread comes in,” said Jason Berry, chief operating officer of Burlingame, California-based debt broker Slatt Capital.
In Trepp’s survey of life insurance lenders, quoted spreads are at record lows, meaning they are receiving thinner profits and some are taking on more risk. And lenders haven’t raised spreads since the 10-year Treasury rose and instead have been cutting them slowly, said Andy Boettcher, Trepp’s head of research. The exception is the office, where the spread has risen.
Lenders typically hold the line on loan terms when pricing, he said. With a higher base rate, even thinner margins can still beat the money itself. CBRE’s numbers agree: Spreads on fixed-rate commercial loans averaged 197 basis points over Treasurys in the third quarter, 23 basis points tighter than a year earlier.
Smaller loans show a similar pattern. Borrowers looking for fixed-rate loans through Slatt, which typically arranges loans under $10M, were quoted about 6.5% in the third quarter, up from 6.2% a year earlier, although Treasury yields rose faster. Lenders absorbed much of the increase, shaving the typical markup on Treasurys to less than 2 percentage points, according to Slatt.
Not every lender plays that game.
“When the competition has increased, we have generally seen spreads remain relatively flat rather than tighten materially,” Niraj Shah, global head of credit for real estate at Chicago-based Harrison Street Asset Management, which said it manages more than $110B. “We continue to prioritize credit quality over chasing volume.”
Still, the machine is built to keep the loan. Loan originations are paid by volume, and Berry said that many banks require borrowers to keep 10% to 20% of the loan amount on deposit, which makes the loan more expensive than the bank’s interest rate.
And for the biggest banks, which have written off problem loans, higher rates mean more returns on new loans, Boettcher said. He riffed on Homer Simpson’s toast to alcohol: “Higher interest rates may be both the cause and the solution to all bank problems.”
Where the Money Goes Back
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Bisnow / created with ChatGPT
Outside the velvet rope, the environment changes rapidly. CBRE’s index of loan closing activity fell about 30% from the second quarter to the third.
After easing defaults in the previous quarter, banks reported net tightening in every category of commercial real estate loans in the third quarter, according to the Fed’s latest survey of senior loan officers.
They also tightened lending to nonbank lenders even as demand for such funding increased. That could eventually reduce the war at the top, as many debt funds compete for CRE loans with bank credit lines. These funds and other alternative lenders made up 48% of nonagency CRE loans in the third quarter, from 37% a year earlier, while the bank’s share fell to 26%, according to CBRE.
Bond buyers also flinched. In recent CMBS deals, the riskiest investment-grade bonds now pay about 5.4 percentage points over Treasurys, up from 4.8 in early September, according to Trepp’s pricing table. Issuance of conduit CMBS, which loans on most properties, fell to $1.6B in October from $6.5B a year earlier.
CRE-backed loan obligations, bonds backed by short-term loans that bring properties through renovations and rentals, still issued $8.7B in September and October. But those deals are lined up over the summer, Boettcher said, and many issuers are now waiting for the new year before doing more deals.
“CRE CLOs sound more like resting hard,” Buschbom said.
REITs, some of the best credit in the industry, borrow less — and by choice. They sold $950M of unsecured bonds in October, down from $7.4B in July, according to Nareit data.
“When rates go up, you’re going to see it hit the brakes,” said John Worth, executive vice president of investor research and outreach at Nareit, a Washington, DC-based REIT trade group that owns more than 560,000 properties in the US.
In the Deal Table
On the ground, rate hikes sort deals into winners and victims, and the winners continue to close.
Deal flow at Matthews, a Nashville-based brokerage with more than 30 offices that says it has handled more than $84B in sales, shows a miniature split. In the 60 days to October 26, closings were up 18%, although deals falling out of contract were up 50% from a year ago.
The victims are mostly buyers who haven’t locked in a rate, said Kyle Matthews, the company’s founder and CEO. When Treasury yields jump before closing the loan, the expected return shrinks. In the same 60 days, deals that received a price cut after contracting nearly doubled to 75 from 38 a year earlier. The cuts aren’t deeper, just more general.
In 2022 and 2023, many owners are waiting for the price to drop again. Some are still waiting.
“Sellers are capitulating,” Matthews said. “They don’t have time for loans.”
Sales of distressed properties rose 26.4% in the first nine months of the year, led by apartments, as owners faced the music, according to a Bisnow MSCI data analysis.
Lenders, Matthews said, are still at the table: “We haven’t seen lenders exit the market. … Right now, it’s more expensive, but we have competition.”
Deal cancellations at the firm rose about five weeks after yields on the 10-year Treasury, the benchmark for fixed-rate commercial mortgages, topped 5% this fall, the highest level since 2002. While the 10-year eased — just shy of 4.9% this week — the cancellation rate fell back below the prespike.
He called it a “temporary 45-day dislocation.”
The Squeeze
Mathematics has ceased to work for a vast industry. Borrowers left outside the war have weaker assets, have floating loans or owe more than new loans.
The mid-tier is having a “harder time getting funding back,” Buschbom said, and is filling the gap with loan extensions and more expensive layers of financing, such as preferred equity and subordinated debt. Banks also demand more equity from borrowers before modifying the loan.
“Floating-rate multifamily is going to feel a lot of pain,” he said.
Even Blackstone is not immune. In October, when Trepp’s survey recorded the lowest spreads for prime properties, it missed maturities on floating-rate CMBS loans backed by apartment properties from Seattle to Bradenton, Florida, sending those loans, now $517.7M of the original $1.3B, into special servicing.
Owners who strategize on low-cost loans feel the most.
“If you’re used to 2% and you use a ton of leverage at 2%, life is really hard at 5%,” Worth said.
Delinquency rates have dropped recently, but they also hide tensions. Trepp’s CMBS delinquency rate fell to 7.9% in October from 8% in September, the highest since late 2020, but only because of $975M in loans today. Office errors rose to 12.3%.
And reaching the maturity date does not mean the loan will be repaid. Nearly every CMBS loan that reached its final maturity from August to October is now prepaid. But only 36% to 41% of the monthly group had paid in October, according to a report Trepp shared with Bisnow.
Another $4.4B is due this month, and Trepp estimates more than two-thirds cannot be fully refinanced, requiring owners to pay more. Fixed rate loans in the group average around 4%, while new loans range from 6.4% to 7.1%. The gap is a problem.
For lenders bailing out troubled borrowers, the phone is ringing.
At Mavik Capital, a New York-based real estate credit investor with $2B under management, the deal pipeline to restructure or recapitalize troubled properties has roughly tripled since the summer, CEO Vik Uppal said.
Borrowers who call him now need money rather than want it, and for him, “it’s not always about the price, it’s about the solution.”
Uppal disputes the idea that strong competition means a more healthy financing market.
“They want to believe what they want,” Uppal said of the more traditional lenders making the case.
Lenders face pressure from their own investors and their own lenders, he said.
“It’s time to go beyond-and-pretend it’s over,” he said, referring to lenders’ habit of extending loan problems instead of taking losses.
And they expect that calculation to be visible in 2027.
“It’s a slow train,” he said. “But that doesn’t mean train wrecks won’t happen.”