Risk of Default Rising For More Than $1 Trillion in Commercial Real Estate Debt

By Holly Dutton

A new report from Newmark has found that around $1.2 trillion in debt on commercial real estate in the U.S. is “potentially troubled.” The second quarter capital markets report from the brokerage firm noted that the debt in question is set to mature between 2023 and 2025, during a time with significantly higher debt costs than when the loans originated. Many loans are underwater or are close to being underwater, including large portions of office debt. Meanwhile, CRE debt origination activity fell significantly in the first half of 2023, decreasing 52 percent year-over-year and 31 percent since the pandemic started. Compared to one year ago, there are 32 percent fewer active lenders in the market today. “The bigger issue is that the small and regional bank lending engine that has driven the CRE market is rapidly slowing with no clear replacement,” Newmark wrote in the report. 

This year has already seen some of the largest office owners default on loans tied to their properties. Early in 2023, Columbia Property Trust defaulted on $1.7 billion of loans connected to seven of its office buildings across the U.S. In April, Brookfield defaulted on a $161.4 million mortgage for 12 office buildings, mostly concentrated in the Washington, D.C. area. Data released by Trepp in June showed that defaults were indeed on the rise among owners of office properties. In May 2023, office delinquencies surpassed 4 percent for the first time since 2018, a jump from 1.63 percent the year prior. While the rising number of defaults is certainly more bad news for the sector, looking at the big picture, the number of defaults is still nowhere near numbers seen during the Great Recession, and without real evidence yet that maturing debt will lead to foreclosures, it’s possible the industry will be able to weather the storm.

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