A lot of CRE risk expectations have been sitting with the office sector for obvious reasons. According to Green Street, for example, by the close of 2023, approximately $25.3 billion of such loans will have been set to mature across 245 loans with a total property count of 602. The majority will face “significant refinancing challenges,” though of that number, $16 billion worth have extension options.
But it’s not the only sector facing rough times, because current market conditions are complex and can reach out in easily overlooked ways. Industrial, still exhibiting strength, is potentially facing problems from corporate debt maturing into unfavorable financing conditions and rising vacancies from new inventory coming out of construction.
Fitch Ratings just came out with a report reminding everyone not to use office as a way to forget other problems. “The roughly $3 trillion-plus commercial office sector is one of the largest CRE property types, but still only comprises a low-teen percentage of the total estimated U.S. CRE value,” they wrote. “Enclosed retail, full-service hotels and multifamily are property formats with higher refinance risk that also warrant scrutiny.”
Higher interest rates have been pressuring borrowing costs and CRE valuations. Fitch notes that the 10-year Treasury is 300 basis points above the 2020 lows and a full 100 points above March 2022.
“Within office, urban properties outperformed suburban and medical office in terms of the refi percentage, notwithstanding the former’s acute exposure to remote work,” Fitch wrote. “Most retail formats, not just malls, face greater refi risk than the office sector average. Weak business transient travel continues to challenge urban, full-service hotels. Lastly, although multifamily had below-average risk, the smaller conduit subset showed above-average refi risk that exceeded most office types.”
A Fitch-conducted analysis of CMBS transactions suggested that loans backed by retail, hotel, and mixed properties, with percentage of office loans able to refinance larger than the average for any of those three types.
Although Fitch didn’t mention this, an outcome of the debt ceiling delays will be a massive sales of government bonds so the Treasury can raise the cash. The sudden demand will pull a lot of liquidity out of markets, drive yields up and prices down, and probably result in even higher interest rates, with Bank of America estimating that it could be the equivalent of an additional 25-basis point hike.
That will put even more stress onto the system when it comes to refinancing, even if looking to short-term refinancing in hopes of lower rates being in the near future.
