The coming wave of CRE loan maturities

CBRE recently published a noteworthy article outlining the coming wave of CRE loans over the next five years. In light of recent bank deposit mayhem, the stats are a critical overlay for understanding the possibility of growing distress. Depending on sources, it’s estimated banks hold somewhere between 65% and 90% of all CRE loans. The estimated breakout of coming loan maturities in future years is as follows:

• 2023 Maturities: $447 billion

• 2024 Maturities: $486 billion

• 2025 - 2027: over $500 billion each year

Majority of these loans were presumably issued in the last couple years, when rates floated in the 3% - 5% rate depending on a host of factors like duration, location and risk profile. In an earlier article I outlined the cost to borrowers jumping from a 3% loan to a 6% loan. Debt service doesn’t perfectly double because of amortization, but it does lead to a scenario where any debt rolling or refi of these vintage loans must be accompanied by significant equity infusion to right-size loans back to acceptable DSCR level.

If banks cuts back on lending because of recent turmoil (a very likely scenario) AND borrowers are forced to recapitalize trillions of dollars of loans in the coming years with upwards of 30 - 50% more equity, what happens? Two scenarios: 1) banks won’t refi certain loans, leading to forced selling of properties to fund loan repayments and 2) borrowers who are lucky enough to refi may still be forced to sell if unable to raise the required equity to right-size DSCR levels. It all comes down to capital constraints and forced selling, otherwise known as a “liquidity crisis”.

The Fed put us on this course originally with sky-high rate hikes. Stock market and other asset market devaluations further exacerbated the problem. And now banks are failing, causes a general retraction in the liquidity of this important source of capital. The upcoming CRE wave could lead to a wipeout. It’s clear where the risks currently stand.