Landlords Face a $1.5 Trillion Commercial Real Estate Maturity Wall

(Bloomberg) — Landlords for offices, apartment complexes and other commercial real estate have $1.5 trillion of debt due by the end of next year, and about a quarter of that borrowing could be hard to refinance, according to Jones Lang LaSalle Inc.

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The value of buildings has broadly dropped after higher interest rates boosted funding costs for property owners. Those lower valuations make it harder for landlords to borrow as much, forcing many property owners to raise equity capital to secure new debt or extend their existing facilities.

Apartment buildings, which make up about 40% of the looming maturities, are at the center of the refinancing wave, the broker says. Many US owners of the assets known as multifamily bought their properties using three-year floating rate loans during the easy money era. Interest rate increases since then have eaten up much of their rental income, making it a challenge to secure additional equity.

Rising insurance costs and falling values have added to the pain, leaving about $95 billion of the US properties in distress or at risk of becoming so, according to data compiled by MSCI Real Assets.

“A large portion of the multifamily world is underwater at the moment,” said Catie McKee, director and head of commercial-mortgage backed securities trading at Taconic Capital Advisors. “A lot of the equity is gone, but it’s an asset class that is pretty resilient over time. It’s underwritable, it just needs a capital infusion.”

The looming debt maturities are also a potential headache for Wall Street after many of the floating-rate loans were bundled into the $80 billion commercial real estate collateralized loan obligation market and sold off as bonds to investors. Even so, trouble in the commercial real estate market isn’t seen by investors as a systemic issue for banks.

In response to higher borrowing costs, CRE CLO lenders are modifying loans to try to help keep borrowers afloat until interest rates drop, additional equity can be injected or junior debt such as mezzanine loans can be secured.

With the outlook for interest rates cuts becoming clearer, there’s optimism that large scale distress can be avoided in the wider CRE market.

The number of lenders submitting quotes for debt refinancings has doubled on average this year, said Matthew McAuley, a research director at JLL, who said the funding gap is $200 billion to $400 billion at present.

‘Constrained Cycle’

While some traditional lenders are focused on working out their problem loans, other banks, life insurers and direct lenders are willing to extend more credit, he said.

“It’s been a more constrained cycle this time around,” McAuley added. “Banks don’t want to take over assets if they can put a new business plan in place and get an exit.”

As a result, debt funds may find fewer opportunities to deploy capital than expected, said Willy Walker, Chief Executive Officer at Walker & Dunlop Inc.

“The cycle has healed to the point of CMBS coming back, the agencies are coming back, and banks have started to lend back into commercial real estate,” he said on a video call with reporters earlier this month.

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Week in Review

September and the beginning of October might be the last opportunity that US investors have to buy newly issued high-yield debt this year.
Companies are pulling back on bond issuance in China’s domestic market, with deal cancellations rising to the highest level since April amid Beijing’s efforts to cool a recent debt rally.
Lumen’s restructuring — considered the poster child for creditor violence — has become one of the most successful distressed trades of the year, even for those that got left behind.
Investors are set to have their first shot at buying European collateralized loan obligations through an exchange-traded fund, following the growth of the asset class into a multi-billion dollar market in the US.
China’s credit market got its first floating-rate corporate bond in more than four years, offering investors an option to hedge against rising rates after yields saw their biggest monthly jump since 2022.
Country Garden Holdings Co. told some investors that it is considering further extending payments on some of its yuan bonds, as a prolonged sales slump adds to the Chinese developer’s financial stress.
Alimentation Couche-Tard Inc., a convenience store operator, plans to issue debt and tap its pension shareholders to finance a proposed deal to buy out 7-Eleven owner Seven & i Holdings Co.
Deutsche Bank AG will lead a $4.325 billion bond-and-loan offering to help finance the buyouts of two casino-equipment firms that had planned to merge before Apollo Global Management Inc. swooped in with a $6.3 billion bid.
Vista Equity Partners is in talks with both Wall Street banks and direct lenders to obtain around $1 billion of debt financing to support its acquisition of software company Jaggaer.
Global alcohol maker Diageo Plc sold new long-dated euro debt as part of a bumper corporate bond offering, with new issuance stepping up a gear in Europe’s primary market.
Blackstone Inc. is in discussions with banks for a five-year loan of about A$5.5 billion ($3.7 billion) to back its bid for Australian data center operator AirTrunk.
Bankrupt health care system Steward Health Care has found buyers for six of its Massachusetts hospitals after state authorities provided a $30 million lifeline.
The largest shareholder of ailing Brazilian airline Gol Linhas Aereas Inteligentes SA is nearing a deal to raise $1.3 billion of funds from investment firm Castlelake LP to stave off the risk of defaulting on its bonds.

On the Move

Carlyle Group Inc. partner Massimiliano Caraffa is in the process of leaving the firm after spending the past two decades at the US-listed alternative asset manager.
Corbin Capital Partners has recruited Holly Cunningham from JPMorgan and Justin Smith from Bank of America as research analysts, to focus on both alternative asset and private credit research.
Theresa Shutt has stepped down as head of corporate debt at Fiera Capital Corp.’s private debt unit.
Mizuho Americas has hired Thierry Perrein as a managing director and credit strategist, adding to its fixed-income business.
Bradesco Asset Management, Brazil’s third-largest fund manager, has doubled its private credit team in the past two years as a booming corporate-debt market helps the industry weather slumping demand for other types of investments.