A typical maturity schedule for commercial mortgages, in this case the exact numbers reported during 2022, looks like Figure 1. As of December 2022, approximately 16% of total outstanding mortgage debt was scheduled to mature in the following year. Thus, 20% maturing during 2024 is an upward shift in expectation. Figure 2 shows the same information with the maturities reported as of December 2023 added to the chart. There is a notable increase in the absolute dollar amount maturing in 2024 between the two reporting periods. It is reasonable to surmise that a good portion of the mortgages maturing during 2023 were extended for a year. Depending on the circumstances, this could be considered a weakness.

Commercial debt exposure by sector and lender type

Given recent turmoil in property performance, identifying the sectors supporting this level of debt and surge in maturities matters. The two charts in Figure 3 combine to describe sector exposures. Notice in Figure 3A that multifamily collateralizes $2.1 trillion of the total $4.7 trillion outstanding. We then see in Figure 3B that only 12% of the multifamily debt outstanding will mature during 2024 and 10% will mature during 2025. There is no evidence of market wide problems in this sector. The office sector is probably the most concerning given that one-third of the office debt of $737 billion is due to mature during 2024. From Figure 3B we might assume that the office, industrial and hotel sectors accepted the most extensions from 2023. Industrial and hotel fundamentals are likely strong enough to support a painless resolution in the surge of maturities. The office sector will produce some winners and losers.

Commercial debt outstanding and due by sector

When evaluating threats to the debt market, knowing the lender status is as important as the sector exposure. In a similar fashion to the previous figures, the charts in Figure 4 combine to describe lenders’ exposure to mortgage assets and their scheduled maturities. Figure 4A reveals that banks hold the largest proportion of mortgage debt. Government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac are much larger in terms of total mortgage debt but most of that goes to single-family loans. In the commercial context, GSEs are limited to multifamily, and they hold about half of the bank exposure.

Banks have a significant exposure at approximately one-third of all mortgage debt outstanding, with 25% of the loans maturing this year. We will likely learn over the year that large money-center banks face relatively little of this exposure and that most of it is held by local and regional banks. If interest rates remain stable, elevated bank failures are on the horizon, but that is a different story. Another exposed lender is the set of private financing funds. These lenders typically lend short-term on aggressive projects that account for the high rate of maturities this year – over 35%. If these funds struggle to collect upon maturity, the market may lose a relief valve as these funds often fill lending voids.

Commercial debt outstanding and due by lender type

The most surprising component of Figure 4B is the high percentage of commercial mortgage-backed securities (CMBS) due in 2024. Market participants note that CMBS was a very active lender during 2014 which may account for a higher-than-normal percentage due. However, the change in 2024 CMBS maturities from 2022 to 2023 suggests that a significant portion of 2023 maturities were sent to the special servicer and extended to 2024 or beyond. Unlike banks and private financing funds, these extended maturities have little effect on originations and new issuance other than to add some uncertainty to the market.

With such clear evidence of recent maturity extensions and the relatively high level of current maturities, it seems appropriate to understand what borrowers face in terms of refinancing. It is clear that debt financing is unusually tight with fewer lenders in the market and stricter underwriting standards, according to the latest surveys of UF Bergstrom Real Estate Center advisory board members. We will focus strictly on the financial conditions. Figure 5 shows a 10-year history of commercial mortgage rates as reported by the American Council of Life Insurers (ACLI). These rates represent relatively low-risk commercial loans. It is the change over time that is interesting.

Source: American Council of Life Insurers (ACLI)

Refinancing a hypothetical $25 loan

Most commercial loans are on stable properties and have an initial term of five, seven or 10 years. Looking back on the schedule in Figure 5, it is possible to estimate the impact of refinancing at today’s rate. Consider an investor looking to refinance a hypothetical $25 loan on a property purchased with debt 10 years ago. The original annual interest rate may have been at 4%, making the annual debt service (ADS) $1 (Figure 6). Had the investor refinanced during 2023, the new rate would have been roughly 5.75%. Replacing the $25 loan would require $1.44 in ADS. If the property’s net operating income increased 4% per year, assuming a 10-year hold, then the investor would return to a similar position as the original investment. If the investor rolled over to 2024, the new rate would be 6.75% and the required ADS would be $1.69. Now, property income would have needed to rise by 69% over the holding period to keep the investor in the same position.

Only borrowers establishing two-to-four-year mortgages during 2020 and 2021 will face the full effect of mortgage rates doubling. There are certainly very few of these loans other than construction loans. Rather, the interest rate hike is a bit muted and income in most cases has risen. Undoubtedly, interest rates settling 250 basis points above recent levels brings challenges to the property debt market, and extending maturities has not yet relieved the pressure. Some market participants will likely suffer significant losses. Others will lament what might have been and accept that property investment has been good, if not great. Still others will find a way to extract great opportunities from the market changes. In any event, the wall of debt is real and significant but likely not deadly.