Landlords face a $1.5 trillion commercial real estate maturity wall

(Bloomberg) — Owners of office, apartment complexes and other commercial real estate have $1.5 trillion in debt by the end of next year, and about a quarter of that debt could be difficult to refinance, according to Jones Lang LaSalle Inc.

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Building values ​​fell sharply after higher interest rates increased financing costs for property owners. These lower valuations make it harder for landlords to borrow as much, forcing many landlords to raise capital to secure new debt or expand their existing facilities.

Apartment buildings, which account for about 40 percent of maturities looming, are at the center of the refinancing wave, the broker says. Many American owners of assets known as multifamily bought their properties using three-year variable rate loans during the era of easy money. Rising interest rates 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 U.S. property distressed or at risk of becoming distressed, according to data compiled by MSCI Real Assets.

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

The looming debt maturities are also a potential headache for Wall Street after many of the variable-rate loans were included in the $80 billion commercial mortgage bond market and sold as bonds to investors. Even so, the problems in the commercial real estate market are not seen by investors as a systemic problem for banks.

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

As the outlook for interest rate cuts becomes clearer, there is optimism that widespread distress can be avoided in the broader CRE market.

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

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“Constrained Loop”

While some traditional lenders are focusing on solving problem loans, other banks, life insurers and direct lenders are willing to extend more credit, he said.

“It was a tighter cycle this time,” McAuley added. “Banks don’t want to take over assets if they can implement a new business plan and get an exit.”

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

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

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The week in review

• September and early October could be the last opportunity US investors have to buy newly issued high-yield debt this year.

• Companies are pulling back from issuing bonds in China’s domestic market, with deal cancellations rising to their highest level since April, amid Beijing’s efforts to cool a recent surge in debt.

• Lumen’s restructuring — considered the poster child for creditor violence — has become one of the year’s most successful distressed deals, even for those left behind.

• Investors are set to get their first chance to buy European covered debt through an exchange-traded fund, following the rise of the asset class in a multibillion-dollar market in the US.

• China’s credit market received its first floating-rate corporate bond in more than four years, giving investors an option to hedge against rising rates after yields posted their biggest monthly rise since 2022.

• Country Garden Holdings Co. has told some investors it is considering further extending payouts on some of its yuan-denominated 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 7-Eleven owner Seven & i Holdings Co.

• Deutsche Bank AG will lead a $4.325 billion bond and loan offering to help finance the acquisitions of two casino equipment firms that had planned to merge before Apollo Global Management Inc. to come up with an offer of 6.3 billion dollars.

• Vista Equity Partners is in talks with both Wall Street banks and direct lenders to raise about $1 billion in financing to support its acquisition of software company Jaggaer.

• Global alcohol maker Diageo Plc sold new long-term euro debt as part of an exceptional corporate bond offering, a new issue that has stepped up speed in Europe’s primary market.

• Blackstone Inc. is in talks with banks for a five-year loan of about A$5.5 billion ($3.7 billion) to support 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 offered a $30 million bailout.

• The biggest shareholder of troubled Brazilian airline Gol Linhas Aereas Inteligentes SA is closing in on a deal to raise $1.3 billion from investment firm Castlelake LP to avoid defaulting on its bonds.

In motion

• Carlyle Group Inc. partner Massimiliano Caraffa is in the process of leaving the firm after spending the past two decades at the U.S.-listed alternative asset manager.

• Corbin Capital Partners has recruited JPMorgan’s Holly Cunningham and Bank of America’s Justin Smith as research analysts to focus on both alternative asset and private credit research.

• Theresa Shutt has resigned as head of corporate debt at Fiera Capital Corp’s private debt unit.

• Mizuho Americas has hired Thierry Perrein as 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 cope with falling demand for other types of investments.

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