Liquidity gridlock worsens in US commercial real estate sector
November 8, 2023
Rising caution among private lenders will worsen the paucity of liquidity for property owners who have no real exit option.
Two-year interest rate caps that protected against rising rates mature in coming years, and new caps that used to cost thousands now cost in the tens of millions of dollars, said several industry players.
As property valuations dropped on weaker fundamentals, borrowers also qualified for a smaller senior refinancing loan at rates that were at least 500 basis points higher.
Razmig Boladian, co-managing partner at Rubicon Point Partners said even if lenders push office property owners to get a loan at any interest rate for a refinancing, they cannot do it because borrowers are unable to pay back their loans and lenders do not have the balance sheet availability to lend.
"The market is strained for liquidity; it's an absolute gridlock. Even with a massive drop in valuations in vacant buildings, there is no guarantee you will generate returns to justify the investment," he added.
Selling out of an asset is also becoming harder. Either there are no buyers or a limited pool who demand such a low valuation that existing owners could end up with no proceeds after paying off loans, said Claudia Faust, co-founder and managing partner at Hawkeye Partners, a real estate investor.
Though estimates vary, nearly $2 trillion of CRE debt is expected to mature in just the next two years, which will increase demand for private liquidity.
"There is a paucity of lenders in the market. Last year we would regularly compete with 5 to 10 lenders when issuing a new quote but this year, oftentimes, we are the only lender submitting a quote," said Alex Horn, managing partner at BridgeInvest, a private CRE mortgage lender.
They are on track to receive applications for $40 billion of loans in 2023 compared to just over $20 billion in 2022, but only 2% might finally get a loan as some were over-leveraged and likely to struggle with debt servicing payments, said Horn.