Commercial Real Estate Industry Seeks Financing Answers as Lending Concerns Grow

As the U.S. central bank’s 10 interest hikes since March 2022 have slowed lending and deals, the commercial real estate industry is seeking guidance far and wide when it comes to financing, particularly involving the hard-hit office sector.

The CRE Finance Council’s mid-year annual conference this week in New York City served as a much anticipated exchange of ideas as executives took stock of issues facing the industry including approaching loan maturities. Many of the sessions and hallways at the Marriott Marquis hotel in Manhattan were filled to capacity.

One central theme running through the event was the impact of lenders and investors getting more cautious in opening their wallets, moves that hurt loan origination and transaction volume, especially when it comes to offices, a property type disrupted by the slow-to-return rate started by the pandemic.

Meanwhile, determining how to value a property to justify financing or investment has become more difficult. Without reliable market appraisal values, the expectations of lenders, buyers and sellers are pushed further apart, stalling deals. And the higher cost of capital isn’t the only factor pressuring commercial properties as a rise in expenses such as insurance costs eat into cash flow.

“There’s a fair amount of inertia and uncertainty,” Bill Gallagher, managing director at M3 Partners, a financial advisory firm, said in an interview. “There is not as much lending going on in the real estate markets in general, but it’s more pronounced in office. With interest rates high, it’s hard for properties to qualify for loans, and that’s causing a lot of dislocation in the market. Office is where the bigger problems are found [as both] the asset side and the debt side have problems. It’s a very tough market. … It’s going to get worse before it gets better.”

M3 helps distressed companies reorganize and has worked on commercial real estate financial restructuring cases, Gallagher said.

Almost $1.4 trillion of commercial mortgages are set to mature in 2023 and 2024, according to Moody’s Analytics in a study published last month.

Only 30% of $1.15 billion in fixed-rate office loans on the commercial mortgage-backed securities market that matured through April this year were paid off, the sister company to ratings firm Moody’s Investors Service said. It added that over 60% of the remaining $7.8 billion upcoming maturities in 2023 may have difficulty refinancing.

“Most market participants are aware of the coming wall of maturities in commercial mortgage loans,” Moody’s said. “Compounded with rising interest rates, lending capacity issues, and tightening credit conditions, this poses significant challenges. On top of that, the office sector is facing existential questions about longer-term utility and tenant demand. … The office sector is clouded by uncertainty.”

Investors got a break from interest rate hikes Wednesday as the Federal Reserve opted to pause increases for now.

The failures of regional banks such as Silicon Valley Bank and Signature Bank that were among key lenders for the commercial real estate sector have added to challenges facing the industry, even though they also made room for alternative sources of financing including private debt funds that are seeking opportunities.

Industry participants at the conference, echoing remarks elsewhere, said office and other properties in desirable markets and locations and with appealing amenities and other features still have no problem getting financing.

“The sources of capital are going through a big change right now,” Brian McCracken, co-founder and chief executive of North Shore Systems, a commercial real estate finance software provider that counts among customers real estate services and investment firm CBRE and mortgage giant Freddie Mac, said in an interview. “Everyone is just getting real conservative now, because of the bank failures. … The private debt funds are really the ones who are stepping up to kind of fill that void. Private investors [including private equity and family offices] are pooling their money together into a fund to invest in both commercial real estate debt, as well as equity.”

Indeed, private equity giant Blackstone Group, billed as the world’s largest commercial property owner, has pointed to real estate lending as an opportunity.

Blackstone executives said in April the firm plans to partner with regional banks, which have been losing deposits after the fallout of Signature Bank and Silicon Valley Bank, to provide loans for uses including auto financing and home improvement.

Commercial real estate new loan origination has declined 25% to 30% while loans that have been sent to special servicing have risen to 6% to 7% of loans, compared to zero to 1% “in a typical year in a healthy economy,” McCracken told CoStar News, based on data from its system.

“It doesn’t sound like a lot,” said McCracken, who co-founded North Shore in 2000. “It’s pretty significant. … There are a lot of loans that are coming up for maturity and need to be refinanced. That’s why everyone is so worried because there’s such a big wave of loans coming up for refinancing, as, at the same time, rates are going up and valuation is getting more difficult.”