More Deals May Be Bad News for Some Real Estate Lenders

By: Anneken Tappe · February 15, 2024 · Reading Time: 2 minutes

Chickens Are Coming Home to Roost

The U.S. commercial real estate market is finally poised to pick back up after years of muted transactions. More deals sound like a good thing, right? But for commercial real estate lenders, it could be a double-edged sword.

Trillion Dollar Triage

The pandemic sparked a massive transition to work from home, which left the future of the $20 trillion commercial real estate market up in the air. Dealmaking all but ceased in the face of this new reality and high interest rates.

Now that activity is picking back up, it also means that owners of commercial real estate will have a better handle of the real valuation of their assets, should they need or want to sell them. With little market activity, it’s harder to gauge that. This matters especially, because a mind-boggling amount — at least $1 trillion — of commercial real estate loans will mature by 2026, per industry analytics firm Trepp.

For building owners, this makes the values of their assets matter so much more, especially, if their value has diminished. In New York and Los Angeles, for example, discounts around the 50% mark have been recorded by brokers and in sales.

Meanwhile, lenders may be exposed to office buildings with loans worth far less than their original price. Extending maturities on this debt could work if the commercial real estate market can bounce back. But if demand has diminished permanently, lenders may eventually have to grapple with sizable losses. And if things get ugly, there could be ripple effects for the economy, and lenders, too.

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