Pending disaster in commercial real estate mortgages

Investment Analysis Clubs Macro Economic Trends and Risks
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This will be a slow-motion train wreck over the next 3 years.

Interest-Only Loans Helped Commercial Property Boom. Now They’re Coming Due.

Landlords face a $1.5 trillion bill for commercial mortgages over the next three years

By Konrad Putzier, The Wall Street Journal, June 6, 2023

Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp. Many of the commercial landlords on the hook for the loans are vulnerable to default in part because of the way their loans are structured. … Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021…

Typically, owners pay off this debt by getting a new loan or selling the building. Now, steeper borrowing costs and lenders’ growing reluctance to refinance these loans are raising the likelihood that many of them won’t be paid back. …

Fitch Ratings recently estimated that 35% of pooled securitized commercial mortgages coming due between April and December 2023 won’t be able to refinance based on current interest rates and the properties’ incomes and values. While many malls and hotels face high default risks, the situation is particularly dire for office owners. …

Defaults could hit regional and community banks that are heavily exposed to the sector, forcing them to write down the value of commercial mortgages on their books and set aside more cash to cover for losses… [end quote]

Recent trends have yanked the rug out from under the property owners’ plans. Remote work reduces tenancy of office buildings. e-Commerce reduces sales in malls. And, of course, higher interest rates make it more difficult to refinance loans.

Like the gradual failure of zombie companies unable to roll over low-interest loans, commercial real estate mortgages will gradually fail over the next 3 years if interest rates stay at the current level…or even if they fall but not to the ultra-low emergency yields of the Covid years.

Wendy

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Wendy,

I disagree that this will be a slow motion train wreck over the next three years.

Not known by me for sure…but trying to meter out the future…if a major portion of the 35% noted just above fail it is not just on individual properties. It involves corporations with multiple properties. This can train wreck entirely over the next 2 to 10 months.

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I just read about an owner of a big hotel in CA (San Francisco I think) handing the keys to the lender because they stopped paying the mortgage this week. And that’s a hotel, not even an office building!!!

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Was that the San Fran Hilton construction? Or something else? The Hilton construction as I glanced at it stopped.

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Article says “Park Hotels & Resorts”, a REIT, and they are defaulting on 2 hotel loans, one a 1,921 room Hilton branded, and the other a 1,024 room Parc 55 branded.

I guess the bank(s) are now in the hotel business. At least for a while.

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In another apparent blow to San Francisco’s struggling downtown, the investment firm that owns two of the city’s major hotels announced it would cease paying the loans and surrender the properties to the bank. Payments toward the $725 million non-recourse loan ceased in June, according to a news release from Park Hotels & Resorts Inc, which operates the Hilton San Francisco Union Square and the Parc 55 San Francisco…

“Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges — both old and new,” the press release read. “Record high vacancy; concerns over street conditions; lower return to office than peer cities; and a weaker than expected citywide convention calendar through 2027 that will negatively impact business and leisure demand and will likely significantly reduce compression in the city for the foreseeable future.”

DB2

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