Commercial Real Estate Debt Matures Amidst Policy Shifts
Authors & Contributors
Are challenges ahead for regional banks due to their exposure to commercial real estate loans?
The Debt Wall
Total Commercial Mortgages Volume Maturing
The swing in the Federal Reserve’s (Fed) policy, from a low-for-long policy rate until 2022 followed by a rapid firming, poses significant problems for the commercial real estate (CRE) sector and its lenders. Commercial property values have fallen, especially for office space, as the rise of remote work has reduced demand and higher interest rates have made financing more expensive. Outstanding CRE and multi-family mortgage debt stands around $4.5 trillion as of February 2023, with about $1.2 trillion of that set to mature by the end of 2025. Many CRE loans were written when rates were much lower and will likely be rolled over at higher terms and with stricter standards. Indeed, according to the Fed’s survey of loan officers, standards on such lending began firming as soon as the Fed pivoted in 2022. While the Fed’s next rate action will likely be a cut, we think action will be delayed until inflation is perceived to be steadily on track to reach its 2% goal in the second half of the year.
This may prove challenging for regional banks, where CRE exposure is more heavily concentrated. CRE debt makes up 44% of total loans at regional banks versus only 13% at large banks, according to Federal Reserve data. Strong linkages between CRE and regional banks could harm their earnings, which were under pressure to begin with. Recent FDIC data showed profits in the US banking sector fell almost 45% year on year in the final quarter of 2023.
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