Will Rate Cuts Help Commercial Real Estate Debt?
Despite the Fed’s decision to reduce its benchmark interest rates, commercial investors may find that it’s too little, too late for their highly indebted properties.
NEW YORK – With the recent action by the U.S. Federal Reserve to reduce its benchmark interest rates, commercial mortgage rates may have declined over the past few weeks. However, many commercial real estate investors may find that the declining rates are too little, too late for their highly indebted properties.
Since commercial real estate building owners piled on debt when interest rates were low, they found themselves missing payments when rates started rising and revenue slowed. Creditors had extended loan deadlines in the hope that circumstances would improve, but declining property valuations, stalling sales and problems with refinancing have made recovery difficult.
Trepp reported that over $2.2 trillion in commercial property debt is coming due between 2024 and 2027. For 2025, the Fed has penciled in four more quarter point cuts to interest rates, but analysts do not believe that lenders and owners will be able to hold until rates are low enough to refinance.
Lenders who already extended loans are running out of patience, as regulators pressure them to clear bad loans off of their books with lender-induced selloffs, according to Chad Lavender, an executive at the Newmark commercial real estate company.
Other lenders may opt to take control of the highly leveraged buildings, rather than allow owners to continue missing payments. CRED-iQ reported that the value of commercial real-estate loans in foreclosure nearly tripled between January and August this year to reach $19.2 billion.
Source: The Wall Street Journal (09/23/24) Parker, Will
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