S&P Global — 9 September 2024
Daily Update: September 9, 2024
As Maturity Wall Approaches, Banks Eye Commercial Real Estate Holdings
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
The commercial real estate market has undergone remarkable changes over the last five years. Most commercial real estate (CRE) loans were negotiated prior to or just after the COVID-19 pandemic, when the extent of those changes was unclear. But now, the impact of altered work patterns, including work-from-home policies, is obvious. The problems in the CRE market are concentrated in office spaces where vacancy rates have soared and property values have plummeted. As the loans that financed these office spaces come due over the next two years, banks may find themselves holding sharply depreciated assets.
Loan delinquencies have been climbing for nonowner-occupied, nonresidential property loans, which make up the biggest percentage of the CRE market. According to data from S&P Global Market Intelligence, delinquency rates rose to 1.4% in the second quarter. Some banks have started putting extra funds into loss reserves in anticipation of further pain from CRE. Out of concern for changes in the market, US government regulators have established guidance for banks on how concentrated they should be in CRE investments. The number of banks exceeding this guidance fell to 482 last quarter as banks divested CRE holdings.
On the brighter side, many market observers have suggested the Federal Reserve is about to begin lowering interest rates. However, rate changes will probably be modest and are unlikely to return commercial interest rates to pre-pandemic levels anytime soon. As of Aug. 19, the average interest rate on CRE loans originated in 2024 was 6.2%, whereas the rate on those maturing was 4.3%, a jump of nearly 200 basis points.
As loans mature, they must either be paid or be rolled over into new loans. This is known as a maturity wall. According to S&P Global Market Intelligence, approximately $950 billion in CRE mortgages are set to mature in 2024. From there, the value of loans maturing accelerates. In 2025, nearly $1 trillion in CRE loans will mature, with maturities peaking in 2027 at $1.26 trillion.
Some borrowers may choose to default on their loans. However, large-scale defaults would be painful to lenders and could further depress the value of CRE holdings. CRE credit quality has already begun declining, and additional credit deterioration is possible through 2024 and 2025.
Declining CRE credit quality is undoubtedly putting pressure on banks as they contemplate new mortgages for existing and new CRE clients. The problems are believed to be concentrated in banks with more than $100 billion in assets, although their large balance sheets may allow them to weather the CRE storm more effectively.
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