Why More Troubled Commercial Real Estate Loans Will Come Due In 2024 (2024)

FAQs

Why does 2024 look like trouble for commercial real estate? ›

A massive $929 billion of CRE loans are due to mature in 2024, triggering a wave of refinancing in the current high-interest rate environment. For many borrowers, the only way out may be to sell their properties, adding fuel to the fire of plummeting property prices.

Trepp projects that a total of $602.6 billion in commercial mortgage loans, including multifamily, will end up coming due in 2024. Many of the 2024 maturities have now been pushed to 2025, with $598.0 billion estimated to mature in 2025.

One-fifth, or $929 billion, of the $4.7 trillion of outstanding commercial mortgages held by U.S. lenders and investors will come due in 2024, according to the Mortgage Bankers Association (MBA)'s 2023 Commercial Real Estate (CRE) Survey of Loan Maturity Volumes.

The problems with commercial real estate loans, while bad, have not yet reached a crisis level. The banking industry most recently reported that just under $37 billion in commercial real estate loans, or 1.17 percent of all loans held by banks, were delinquent — meaning a loan payment was more than 30 days overdue.

Compelling opportunities will emerge for commercial real estate investors in 2024, as high interest rates and an economic slowdown—perhaps even a mild recession—lead to bargain pricing for certain assets.

Higher-for-longer interest rates and geopolitical issues could influence commercial real estate in the second half of 2024. Multifamily, retail and industrial continue to perform well, while office vacancies rise.

Commercial real estate (CRE) debt is currently navigating a challenging environment, due to a combination of steeply rising interest rates, falling property valuations, and severe issues in the office sector.

Unlike housing, where loans often are for 30 years, CRE loans usually have shorter maturities (10 years or fewer), and need to be entirely refinanced when they come due. Many commercial loans were made during the recent period of historically low interest rates. So, they now face a double whammy.

The market's slide will hurt the banking industry through banks' CRE lending. Property owners that lose income when their office leases expire could default or, due partly to higher interest rates, fail to refinance when their loans mature and the loan principal becomes due.

Commercial real estate investments can show more resilience than other investments during a recession, but not all asset classes of real estate investments will be able to weather the storm.

How long are most commercial real estate loans? ›

Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years.

In 2025, an additional $570 billion in loans are scheduled to reach maturity, followed by $460 billion in 2026. In total, approximately $2.0 trillion of commercial real estate mortgages are scheduled to reach maturity from 2024 through the end of 2026.

Some of the biggest banks in America are starting to sell off their commercial real estate loans. This means they are getting rid of loans tied to big office buildings because they think these loans are too risky and might cause them to lose money.

Trepp projects that $638.9 billion in total commercial mortgage loans, including multifamily, will come due in 2024, with $540.0 billion estimated to mature in 2025. As the largest commercial mortgage holders, banks and thrifts hold over half of the loans maturing through 2028.

A fixed prepayment penalty charges a set fee if a commercial loan is paid off prior to maturity and within the applicable time frame in which the penalty is in effect. This fee is typically structured as a percentage of the remaining loan balance. For example, a loan might have a fixed prepayment penalty of 3%.

The AIA Consensus Construction Forecast is calling for essentially no growth this year and next overall in the commercial markets. For industrial facilities, current project activity is expected to produce healthy double-digit spending growth this year, but then stabilize for 2025.

Notably, the sharp rise in interest rates has caused all commercial property subtypes, not just offices, to lose value. Indeed, commercial property prices have already fallen by 21% from their mid-2022 peak, according to Green Street, a CRE analytics firm, and could ultimately decline by 35%.

Commercial Real Estate - United States

This projection indicates a significant annual growth rate (CAGR 2024-2029) of 2.18%, leading to a market volume of US$28.16tn by 2029.

Recessions do have an impact on commercial real estate, but not all property types are affected in the same way. Some properties will be at a higher risk of foreclosure, while others can actually yield higher profit margins for investors.