Office, Retail Valuations Face 40% Drop

A new report from Morgan Stanley estimates that about $1.5 trillion in US CRE debt will come due before the end of 2025—and the lending window for refinancing has been slammed shut.

“Refinancing risks are front and center. The maturity wall is front-loaded. So are the associated risks,” the report said.

The investment bank is projecting that office and retail property valuations may drop as much as 40% from peak to trough, increasing the risk of defaults, Bloomberg reported.

The biggest lenders to the commercial real estate sector—small and regional banks—have been shaken by deposit outflows following the collapse of regional banks SVB and Signature, which were shuttered by federal regulators last month, Morgan Stanley’s analysts said.

The tidal wave of debt coming due won’t peak until 2027, Morgan Stanley projected, when the wall of maturities will crest at $550B. Banks own more than half of the CMBS bonds backed by property loans and issued by US government entities like Fannie Mae, the report said.

“The role that banks have played in this ecosystem, not only as lenders but also as buyers” will intensify the wave of debt coming due that is in need of refinancing. Regional and local banks are the largest lenders in the office and retail sectors, the report said.

According to data compiled by Bloomberg News, sales of CMBS without government backing fell by nearly 80% in the first quarter of 2023.

On the positive side—Bloomberg called it a sliver, we’ll call it a glimmer—conservative lending standards adopted in the wake of the GFC will act as a cushion of sorts for falling valuations.

“Commercial real estate needs to re-price and alternative ways to refinance the debt are needed,” the Morgan Stanley analysts said.

CMBS issuance dropped during Q1 2023 to levels not seen since 2012, Trepp said in a report last week.

Domestic, private-label CMBS issuance during the first quarter of 2023 totaled $5.98B—12% less than the fourth quarter and down more than 79% from the same period a year ago. The last time quarterly volume was as low was in 2012, following the GFC, Trepp said.

“Issuers were stymied every step of the way—when they wrote loans and when they tried selling them as bonds. Increasing interest rates wreaked havoc on their ability to profitably originate loans. And increasing bond spreads further worked against them,” Trepp’s report said.

Only four conduit deals were priced during Q1, and two were backed solely by loans with five-year terms, the report said. Single-borrower transactions plunged in volume to six deals totaling $2.7Bn from 26 deals totaling $18.61B a year ago.