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NAR: Don’t Panic as Commercial Loans Come Due

NAR’s chief economist said there’s a rebound on the horizon for commercial brokers and agents. Commercial assets will recover as the economy improves.

BOSTON — Commercial real estate has faced sluggish transaction volume in recent years, about half of what it was before the Covid-19 pandemic. Commercial property prices also have been falling – in stark contrast to the record highs posted in the residential market. And now the sector is coming head-to-head with its next big obstacle: A massive amount of CRE funding is coming due.

Despite such challenges, there’s a rebound on the horizon for commercial brokers and agents who can hold on, said Lawrence Yun, chief economist of the National Association of Realtors®. Yun was speaking at the Commercial Economic Issues and Trends Forum during NAR NXT, The Realtor® Experience, in Boston.

Commercial assets will recover as the economic picture improves, he says. But first, the market has to come through the fire of $1.8 trillion in commercial real estate loans set to mature before the end of 2026. The Counselors of Real Estate recently called out this wave of loan maturation as one of the top 10 biggest challenges affecting commercial real estate over the next year. Borrowers with near-term maturities could be facing new debt service payments that could jump as high as 75% or 100%, the CRE report warns.

Investors who locked in ultra-low interest rates during the pandemic now face a much-higher interest rate environment, making the “ability to repay or refinance under these conditions much more difficult,” Yun said. Further, their property values may be lower than what they were during the pandemic buying rush.

Leslie Biskner, CCIM, executive vice president of the commercial lending group at Cooperative Business Services LLC, Columbus, Ohio, said her company’s lenders are already working with borrowers to tackle this challenge. The company represents about 150 credit unions across the country.

Biskner estimated that $544 billion in loans will mature through 2025 alone. In many cases, she said, the properties’ values have fallen below their original loan amounts and, therefore, will require substantial additional equity for refinancing. Biskner said lenders are working with commercial borrowers through loan extensions, interest-only payment period agreements, or other workouts.

The hope is that such moves will avoid a foreclosure wave in the sector. “Many banks are doing extensions, giving borrowers an additional one to two years,” Yun noted. He believes that extra time could make all the difference, too: “In that time, prices will likely be rising,” he said. “Also, the interest-rate environment could [improve] in that time span, which would make refinancing easier.”

Market growth to accelerate

Yun pointed to several economic conditions that could bode well for the commercial sector ahead: Falling inflation, quicker job growth heading into 2025, and the Federal Reserve’s ongoing reduction to its short-term benchmark interest rate. Those factors could ultimately help push interest rates lower and improve borrowers’ refinancing prospects. Indeed, optimism is growing for more favorable market conditions to occur in the months ahead across the CRE sector, according to NAR’s Commercial Real Estate Insights Report for October 2024 report.

For example, the report noted “robust demand” for rental units, as more new apartment completions begin to arrive on the market from the recent multifamily construction boom. While “currently supply is outpacing tenants, I expect that to be a temporary phenomena that will be worked out over the next six to 12 months,” Yun said, noting that rent growth should be calmer, which will then help improve inflation.

Also, the NAR report notes that retail space remains “exceptionally tight, with available space for lease consistently below 5% over the past couple of years. Demand continues to grow, adding pressure to the market.”

On the other hand, the industrial sector has lost some momentum this fall, with net absorption nearly 60 percentage points lower than a year ago and rent growth falling. “However, further declines in inflation and interest rates in the coming months may boost demand for goods and the volume of projects that were previously shelved or halted during construction,” NAR’s commercial insights report notes. “This usually creates a ripple effect, increasing the need for industrial spaces to manage production, storage and distribution.”

© 2024 National Association of Realtors® (NAR)