2024 Fall Issue of Urban Land - 85

Commercial
Real Estate's
Wall of
Maturities
Should you be concerned
or not?
BRIAN BAILEY
Over the last 18 months, commercial
real estate loans have been maturing
at a torrid rate, in a rapidly evolving
marketplace. Although economic
growth remains resilient, commercial real
estate oversupply, growth in operating
expenses, higher leverage, and the cost
of debt are creating headwinds for commercial
real estate asset values. Moreover,
roughly $2 trillion in commercial
real estate loans will mature by the end
of 2026.
Lenders and commercial real estate
industry participants already struggle
with higher interest rates, oversupply,
and financing issues. All these factors
have put added pressure on the most
important aspects of commercial real
estate: value and cash flow. With rising
foreclosures and the looming level of
loan maturities on the horizon, how are
lenders addressing the issue of loan
U.S. Total Employment
refinancings? Before we answer the
question, lets level-set the current environment.
The
U.S. economy is healthy, but
growth has moderated
Challenges facing commercial real
estate need to be viewed in the context
of broader economic performance.
Although continuing to expand during
the first half of 2024, the nation's economic
growth has moderated versus the
latter half of 2023. Real gross domestic
product (GDP) increased by 4.9 percent
and 3.4 percent in the third and fourth
quarters of 2023, respectively. Growth
cooled to 1.4 percent in the first quarter
of 2024, followed by 2.8 percent
(an advance estimate) in the second
quarter. According to the Atlanta Fed's
GDPNow, real GDP growth was tracking
at 2.1 percent in the third quarter, as of
September 4, 2024. GDPNow's results
are indicating that some slowing in the
economy is occurring. This moderation
is supported by the slowing job growth
results for the months of July and
August.
Similarly, consumer spending remains
resilient and continues to drive economic
growth; however, economists and retailers
are noting that some lower-income
cohort finances have experienced more
stress due to inflation. Concurrently,
consumers appear to be seeking cost
savings via discounts and, in some cases,
trading down from one product to a
cheaper substitute.
The stress caused by changing consumer
purchase decisions is affecting
retail commercial real estate, as retailers
continue to announce store closings.
Such retailers as Big Lots, Walgreens,
Family Dollar, Rue 21, and 99 Cents Only
all announced store closures in 2024.
Still, downward pressure on inflation and
real wage growth, which should allow
discretionary income to continue to
grow, are positives for the commercial
real estate industry.
Commercial real estate
conditions make for a mixed bag
Mixed commercial real estate conditions
and downward pressure on property net
operating income are affecting the ability
to refinance the wall of maturities. On
a global scale, expenses have been rising
at atypical rates and, in some cases,
faster than rents have. In 2022 and 2023,
depending on the location and type of
property, several expense items-property
taxes, insurance, and labor and
utility costs-grew at double-digit rates.
In 2024, expense growth has begun to
moderate.
Generally, the office and multifamily
sectors are still encountering weakness,
Source: Bureau of Labor Statistics; Supervions & Regulations: Risk Analysis Unit/Federal Reserve Bank of America
FALL 202 4
URBAN LAND
85
INDUSTRY VOICES

2024 Fall Issue of Urban Land

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