The United States is facing a monumental challenge as a staggering $2 trillion in commercial property debt is set to mature within the next three years.
This impending wave of debt maturities has the potential to send shockwaves through the banking sector and the broader economy, as lenders deal with the prospect of massive defaults on distressed commercial properties.
Barry Gosin, CEO of Newmark, a prominent real estate advisory and brokerage firm, warns that banks will be under immense pressure to reduce their exposure to the commercial real estate market.
We have no memory. Or we just have selective memory.
CLO is the equivalent to the CDOs that made the Jenga tower crumble in the mortgage crisis in 2008. This time, CLOs are made of commercial RE loans.
I’ll let you arrive at your own conclusions, but to me, the writing seems… pic.twitter.com/JA5apM8Cr9
— El Profesor – Danny Sánchez (@El_Profesor_eth) March 20, 2024
“Banks will be under pressure,” Gosin states, adding that post-financial crisis regulations will force some lenders to “liquidate their loans or find other ways to reduce their weight in real estate.”
The situation is further complicated by the fact that the maturing debt will need to be refinanced at significantly higher interest rates.
According to data from the US Mortgage Bankers Association, a staggering $929 billion in commercial real estate debt is due for repayment or refinancing in 2024 alone. As Gosin puts it, “We are at the beginning of the impact of this wall of loans.”
The most vulnerable segments of the commercial property market appear to be offices and multifamily residential apartment blocks.
The rise of remote work during the pandemic has left many office buildings “under demolished,” with an oversupply of undesirable old properties. Gosin estimates that New York City alone should remove approximately 50 million square feet of office space from the market.
From @Breakingviews: Concerns are growing over $1.5 trillion of commercial property-related debt coming due in the next two years. The stress, initially observed in office spaces, is now extending to apartment buildings. The ride will be bumpy, says John Foley pic.twitter.com/p6oFM0Fnhv
— Reuters (@Reuters) February 16, 2024
The potential fallout from this looming debt crisis cannot be overstated.
Unless interest rates begin to decline, the resulting defaults on distressed commercial properties could have devastating consequences for regional lenders and the broader U.S. economy.
The coming years will be a critical test of the resilience and adaptability of the commercial real estate market and the banking sector’s ability to navigate these treacherous waters.
Failure to address this ticking time bomb could result in a domino effect of defaults, foreclosures, and bank failures, which would have far-reaching implications for the stability of the U.S. economy.
The time for action is now, before the $2 trillion wall of maturing debt comes crashing down on the nation’s financial system.
