By John Gittelsohn | Bloomberg
Newmark Group Inc. reveals that approximately $1.2 trillion of debt on US commercial real estate is at risk due to high leverage and declining property values.
The biggest concern in the near term is the office sector, which accounts for over half of the $626 billion of at-risk debt maturing by the end of 2025. According to Green Street, office values have dropped by 31% since their peak in March 2022, coinciding with the Federal Reserve’s interest rate increases.
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Default rates are expected to rise as property values decrease and refinancing costs increase for landlords. Owners with excessive leverage are more inclined to cease payments rather than invest in properties with reduced return prospects. This year, investors such as Blackstone Inc., Brookfield Corp., and Goldman Sachs Group Inc. have already defaulted or handed over offices to lenders.
In an interview, David Bitner, global head of research at Newmark, stated, “They’re going to have every incentive to hand back the keys to lenders. I’m shocked that hasn’t happened a lot more.”
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Newmark defines “potentially troubled” properties as those where debt accounts for at least 80% of the real estate’s market value. This assessment is based on price indexes including Green Street’s.
Newmark’s data indicates that banks hold the largest portion of at-risk debt, with $303 billion of potentially troubled loans maturing by 2025, following the tightening of lending after this year’s collapse of Silicon Valley Bank.
After offices, the next-largest category of potentially troubled properties is apartment buildings, with an estimated $192 billion in debt requiring refinancing by 2025.
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Bitner asserts that landlords who attempt to weather the storm and hold on to their properties are likely to suffer greater losses than those who cut their losses sooner.
“There’s going to be a reckoning,” he said, “and everybody that waited to deal with the problem is going to regret they did.”
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