High Financing Costs, Looming Loan Maturities Among Top CRE Challenges Article originally posted on Globe St. on October 4, 2024 The cost of financing and a looming mountain of loan maturities are among the 10 current and emerging issues The Counselors of Real Estate identified as having the most significant impact on all sectors of real estate. High financing costs continue to weigh on the commercial real estate market despite cooling inflation and the Fed’s first of several expected rate cuts announced in September. Investors, who anticipated as many as five rate cuts this year, have been left disappointed, which has weighed on expectations for commercial property, said James Costello III, chief economist at MSCI Real Assets. “There’s no question that higher costs are making it more difficult to assess market value and pencil out deals,” said Costello. “On a positive note, the sharp drop in transaction volume that occurred last year shows some signs of stabilizing.” However, Costello cautioned that deal volume could fall in the third quarter and rate cuts alone might not be enough to fuel deal-making. Ultimately it will take buyers and sellers coming off the sidelines to unlock deal flow, he said. Currently, owners are reluctant to sell and buyers are wary of high prices, with many holding out for distressed asset sales. The real estate industry isn’t making much of a dent in clearing its mountain of looming debt maturities, noted Constantine Korologos, clinical assistant professor and principal at New York University – SPS Schack Real Estate Institute. Nearly $1.8 million in CRE loans are set to mature before the end of 2026, according to Trepp. Lenders have been postponing maturing debt with extensions and modifications in anticipation of lower interest rates, fresh equity capital, or improving NOI performance. However, at some point such extensions and modifications will hit a wall, said Korologos. “If, or more likely, when it does, lenders are going to be facing a higher volume of loans that will be more challenging to clear,” said Korologos. “The banks hold a significant proportion of that debt and have limited flexibility in what they can do about it because of regulatory oversight. Banks are not going to be able to continue to extend loans without sufficient capital reserves behind it.” Borrowers with near-term maturities are looking at new debt service payments that could be as much as 75% to even 100% higher than their prior loan, he said. This pushes values up and makes it difficult to refinance as values reset. “Even if interest rates do come down as presently forecast, it may not be enough for those borrowers facing maturity balances that are too high to refinance,” he said. “The outcome is likely to result in a shake-out among weaker operators and those owners that are not well capitalized.”