US Banks Forced to Reduce Commercial Real Estate Exposure
A leading US brokerage predicts that banks will need to reduce their involvement in commercial real estate due to a looming $2 trillion debt “wall” set to mature over the next three years. Barry Gosin, CEO of Newmark, foresees significant pressure on US banks as post-financial crisis regulations necessitate loan liquidation or alternative strategies to lighten real estate exposure. Options include syndicating debt, risk transfer deals, or halting new lending to the sector.
Newmark, a real estate advisory firm, highlights the challenge of refinancing an estimated $2 trillion of US commercial real estate debt between 2022 and 2026, with $929 billion due this year alone. Gosin predicts varying degrees of distress among these loans, with some submerged, some barely staying afloat, and others requiring additional equity injections.
Approximately $670 billion of the maturing loans by 2026 are deemed “potentially troubled” by Newmark, exacerbated by rising interest rates and declining property values. Office spaces and multi-family residential complexes face particular strain, with overexpansion and increased operational costs contributing to the challenges.
Gosin notes a surplus of outdated office buildings, particularly pronounced in the wake of increased remote work during the pandemic. He suggests a need for substantial demolition, estimating that 50 million square feet of office space in New York City alone should be removed.
The strain in the real estate market is felt by banks that previously issued loans during the boom years. Some opt to sell off loans, albeit at discounted rates, to alleviate their real estate exposure. This presents an opportunity for buyers, including wealthy individuals and private equity funds, to acquire distressed loans or take control of underlying assets at reduced prices.
Patrick Arangio, vice-chair of CBRE’s loan sales division, attributes the heightened volume of upcoming loan maturities partly to pandemic-related extensions and global uncertainties. He anticipates a surge in loan sale activities in the near term, driven by the need to resolve a large number of maturing loans.
Despite this, the market for underlying properties remains stagnant, with a significant disparity between buyers seeking bargains and sellers unwilling to accept losses. Commercial real estate deal volumes in the US plummeted by 51% last year, signaling a challenging environment. Gosin believes 2024 will mark a transition year with moderate activity but cautions against expecting a full recovery just yet.
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