The Commercial Real Estate Debt Dilemma is Still Here: Insights and Trends
If it seems like the discussion of mortgage maturities has persisted for years, that’s because it has. A higher rate environment since 2022 combined with softening operating conditions and repricing of asset values left many assets in limbo with outstanding debt greater than the current value of the underlying asset.
Over the past few years, many lenders worked with borrowers to modify or extend loan terms, staving off foreclosure action and allowing borrowers to turn around underperforming assets. While the potential for lower interest rates in the near term may prove to be a solution for some borrowers, the debt dilemma will continue to present tough decisions for borrowers and lenders alike.
Explore key element of commercial real estate’s current debt landscape, the possible repercussions, and potential opportunities available to borrowers and lenders with the following insights.
Maturing Mortgages Remain a Concern
A wave of maturing mortgages has cast a shadow over the commercial real estate industry, exacerbated by elevated borrowing costs. Many lenders extended loans or modified terms rather than repossessing assets, minimizing delinquency and default activity —and perhaps pushing the problem out into the future.
Given the softer demand for most property sectors in the past year, asset values remain lower than loan origination in many cases and lenders must weigh potential turnaround costs if they take back keys.
Loan Modification Impact
The ultimate volume of maturing commercial real estate loans is difficult to measure because of the loan modifications and extensions of the past few years. Based on loan originations, roughly $550 billion of loan maturities were expected in 2025 yet that number is much higher as many loans set to mature in 2023 and 2024 were extended to 2025.
With refinancing capital scarce and few investors in the market to acquire troubled assets, the best choice for lenders was to modify terms. An estimated nearly $400 billion of prior year maturities were added to 2025, resulting in more than $1 trillion of loans maturing in 2025.
Beyond 2025, extensions and modifications will impact loan maturity volume several years out. For example, some large urban office assets received multi-year extensions in part due to the complexity facing owners, meaning the new maturity date will be in 2026 and beyond.
With mortgage rates still high despite Fed rate cuts and asset values in flux, it’s very likely that a large share of 2025 maturities will also receive extensions if they have not already.
Commercial Mortgage-Backed Securities (CMBS)
CMBS can be helpful to outline broader trends in commercial lending, in part because it’s one of the more transparent loan categories. Among modified CMBS loans, roughly 30% received maturity date extensions in 2023 and 2024 combined.
Preliminary data through the first half of this year points to a similar figure. Though CMBS is a smaller component of outstanding loans, the high percentage of usage of term extensions may be transferable to other lender types as well.
Outstanding Loans
Data from originations identifies roughly $4.8 trillion in outstanding loans conservatively; yet, the volume of loans originated in any given year is supplemented by the rollover of loans that were extended beyond the initial term.
With few outright defaults in the past two years and continued extensions for a portion of loans this year, it’s easy to imagine that outstanding commercial real estate debt will exceed $5 trillion in aggregate.
Multifamily loans account for roughly one-third of outstanding mortgages while the office sector is roughly 15%. The surge in industrial investment activity post-2015 brought this segment to between 5% and 10% of outstanding loans.
The shares by property type are relatively consistent for maturities through 2030, when the drop off in recent originations highlights looming challenges and opportunities. Post-2030, multifamily loans comprise the lion’s share of outstanding volume, a function of both the structure of multifamily loans as well as the enhanced liquidity in the sector.
Many of these will benefit from recapitalization opportunities if asset values recover in the medium term as expected. Perhaps similarly, other core property sectors will not only see continued need for refinancings in the near term but also a need for acquisition lending as transaction volume recovers.
Lending Market in Flux
The lending market remains in flux, with debt for real estate relatively available but at terms that may not work financially for borrowers to refinance or new investors to acquire assets. Additionally, underwriting for some property types remains restrictive.
In the last year, loan originations fell to slightly more than $400 billion, a substantial drop from the latest peak in 2021 of nearly $700 billion. At the same time, origination volume was up from the 2023 trough of $300 billion. Lending volume recovered a bit from the stark drop as interest rates increased, and demand slowed but has yet to recover fully.
In aggregate, GSEs claimed the largest share of originations, a function of their liquidity through various cycles as well as strong demand for multifamily loans. In the last year, CMBS loan originations increased to more than 20% of originations, particularly with single asset single borrower (SASB) loans. Several large asset loans were securitized at perhaps narrower than expected spreads, highlighting some resilience. Life companies came in third with slightly less than 20% market share.
Multifamily lending again took the greatest share of volume, roughly half of all loans originated in the last year. The industrial sector accounted for nearly 15% of originations, further highlighting continued investor interest even as tariff-related volatility impacted asset values. The office sector accounted for a small share of lending, underscoring the risk aversion by lenders and difficulties that office investors face today.
Opportunities Abound
With a large number of maturing loans combined with the potential for a demand-side slowdown in the near term, falling interest rates may not resolve all situations. Lenders may continue to modify loan terms, allowing borrowers to continue to manage assets. But unfortunately for some borrowers, asset values may not recover in time and, even with modifications, a growing number of loans may default.
New Acquisition Opportunities
Debt availability remains supportive of new acquisitions, though the cost of capital and lender risk appetite remain hurdles. Traditional core asset debt is priced closer to traditional core-plus or value-add profiles.
Despite this, opportunistic investors may find relative bargains with distressed assets priced well below replacement cost.
Borrower Advantages
Patient capital, as well as borrowers with more flexible lending partners, may have an advantage in the coming years. Borrowers under loan modifications often have restrictions on operations. Some modified loans imposed lender review on new leases and tenant improvement allowances, for example.
This additional layer of review can delay the lease negotiation process, allowing those without such restrictions to potentially move more quickly with potential tenants and thereby gain an occupancy advantage.
Construction Outlook
Lending conditions have also dampened construction activity, with developers across the spectrum of asset types facing a tight debt market over the past two years. Not only has this created distressed development opportunities but also limited the construction pipeline.
In markets where a supply overhang exists, such as multifamily in some Sun Belt cities, the reduction in new supply should mean that organic demand growth should absorb many of the vacant units in the near term. As the vacancy rate drops, tenants may face tightening market conditions in the coming years with little new supply on the horizon.
Opportunistic investors may find opportunities to acquire or provide rescue capital to broken development deals that will potentially deliver new product with little competition.
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To learn more about the commercial real estate debt landscape and how you can respond to it effectively, contact your firm professional.