The issue isn’t just refinancing but origination timing. In 2021, there was a witching hour largely due to macroeconomic decisions by the Federal Reserve and federal government fiscal policy. After the pandemic started, the Fed opened the floodgates of liquidity with large volumes of quantitative easing and a zero-interest rate policy. Congress enabled large amounts of relief aid. Altogether, the result pushed incredible amounts of money into the economy. Investors looked for returns and found them in, among other places, CRE.

CRED iQ put it as “cap rates were compressed, valuations were elevated, and interest rates were historically low.” Prices soared. Buyers could get unusually high leverage for little cost. That might have worked except that it presumed that rates would never climb and valuations, never slide. Many of the loans from that time were three-year floating rates that would slide into maturity during an inhospitable future. Those borrowers who found themselves in trouble have frequently relied on extension options and a hope that conditions would change. As the firm noted, though, the extensions frequently have stricter covenants or higher costs.

Lenders, investors, and asset managers need to monitor current conditions. Enhanced due diligence of metrics like NOI, occupancy, and DSCR can help early identification of at-risk loans. Address loans reaching maturity limits sooner rather than later to understand options. Look for asset classes that continue out of necessity to see strong rental demand, like multifamily. Keep abreast of refinancing conditions that might require “creative solutions, such as bridge financing or equity partnerships.”