By John Gittelsohn | Bloomberg
About $1.2 trillion of debt on US commercial real estate is “potentially troubled” because it’s highly leveraged and property values are falling, according to Newmark Group Inc.
Offices are the biggest near-term problem, accounting for more than half of the $626 billion of at-risk debt that’s set to mature by the end of 2025, the brokerage estimates. Office values have tumbled 31% from a peak in March 2022, when the Federal Reserve started raising interest rates, according to property analytics firm Green Street.
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Concerns are mounting that defaults will increase as property values fall and costs rise for landlords who need to refinance at higher interest rates. Overleveraged owners are often more motivated to stop payments than sink money into buildings with diminished prospects for returns. Blackstone Inc., Brookfield Corp. and Goldman Sachs Group Inc. are among investors that have defaulted or relinquished offices to lenders this year.
“They’re going to have every incentive to hand back the keys to lenders,” David Bitner, global head of research at Newmark, said in an interview. “I’m shocked that hasn’t happened a lot more.”
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Newmark defines “potentially troubled” as properties where debt represents at least 80% of the real estate’s marked-to-market value, based on price indexes including Green Street’s.
Banks, which have tightened lending since this year’s collapse of Silicon Valley Bank, carry the biggest share of at-risk debt, with $303 billion of potentially troubled loans maturing through 2025, according to Newmark.
After offices, apartment buildings are the next-biggest category of potentially troubled properties, with $192 billion in debt needing to be refinanced through 2025, Newmark estimates.
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Landlords who try to hang on and weather the storm are likely to take a bigger hit than those who cut their losses more quickly, according to Bitner.
“There’s going to be a reckoning,” he said, “and everybody that waited to deal with the problem is going to regret they did.”
