You'd be forgiven, if you’ve been reading some of this year's headlines, for thinking that commercial real estate is headed off a cliff.
Commercial mortgages, unlike residential ones, are typically interest-only, last five to 10 years, and generally aren’t prepaid.
That means the only way out of a current loan is to refinance into a new one — the source of the ‘wall of maturity’ fears.
In the last two years these fears have been compounded, with interest rates shooting up and the fundamental dynamics of the commercial real estate market suffering under seemingly structural changes.
Fears of a maturity wall are nothing new for CMBS. It is a recurring dark cloud on the horizon that suggests the amount of commercial loans maturing at once will be too much for the market to handle. Still, fears have never really materialized into anything approaching a crisis.
This time, though lending standards are tighter, interest rates are high, and in several asset classes occupancy rates are a cause for concern.
Moreover, according to Trepp in June, around $135bn of CMBS loans are slated to mature between this year and next — and over $75bn are from the beleaguered office sector. In total, some $1.08tr of commercial real estate loans come due over the same period.
At face value, therefore, it is easy to buy into the fear that 2024's edition of the wall be too high to climb, that lenders will foreclose on properties en masse, and there will follow a catastrophe causing ripples across the economy.
In reality, however, it is unlikely to play out in this way. For one thing, borrowers simply have too many options to navigate a commercial loan maturity. The commercial mortgage market has a tendency to kick the can down the road in a way that few other asset classes do.
Huge swathes of this year's maturities are simply loans that were extended by a year in 2023. It’s simply very rarely in the interests of the borrower or the lenders to foreclose on a property or sell it off to vulture funds for cents on the dollar. Lenders do everything they can to delay marking down any losses.
And it is an inherently flexible market. Borrowers used varied loan terms — including fixed and floating rate, opting for 10-year, 5 year, or shorter terms with optional one-year extensions.
Indeed, this year borrowers are navigating the high rate environment by opting for shorter loan terms with flexibility to extend, and going for floating rate debt as consensus builds that rates are only going down.
Most borrowers are going be able to wait it out for a better environment. Even if that fails, they can work with a special servicer to modify loan agreements.
Finally, even if the supposed maturity wall should be considered a real thing, the advent of lower rates — today priced in as a given — will make it a far easier wall to jump over.
Lower rates, as well as reducing the cost of capital, will also make the underwriting on debt service coverage ratios more favorable for borrowers.
In short, fears over the maturity wall have never really come to pass — and they likely never will. The fear factor is what is really past its expiry date.