Bank failures and looming commercial real estate debt maturity continue to generate concerns, which are justified. However, a recently released Marcus & Millichap Special Report entitled “Banking and CRE Distress” provides some context to the situation. Research experts Jessica Henn and Luke Murphy point out that outside of certain challenged segments, commercial real estate assets are generally performing well. In fact, distressed CRE assets made up only 1.2% of nationwide sales volume in Q4 2020 – 12 quarters after the beginning of the Global Financial Crisis when distressed sales accounted for 20.3%.
Henn and Murphy also note that while reported debt maturities range from $400 billion (MSCI) to $728 billion (Mortgage Bankers Association), increasingly stringent loan underwriting requirements have been in place since the GFC; plus robust rent growth over loan terms has provided owners with sufficient equity to mitigate default risk. Still there is potential trouble ahead for downtown offices or other properties undergoing cash-flow challenges as well as borrowers with variable rate debt who did not hedge against interest rate increases with a rate cap – their interest payments could exceed asset revenue capabilities according to Trepp data showing 5.2% CMBS loans falling into special servicing during February 2021 alone .
However banks holding more than half this year’s maturing CRE debt should not be compared those that failed due primarily non-real estate related issues such as Silicon Valley Bank’s venture capital tech firms exposure or Signature Banks’ cryptocurrency sector involvement; furthermore much outstanding bank originated debts aren’t set mature until later years providing additional time for resolution if needed . Finally it is important avoid blanket generalizations about all types geographies & demand drivers within this wide ranging sector given majority held by banks either have significant equity or years before maturity making them unlikely face distress according authors report findings .
