By Steven Luttman
Not all relationships are built to last. In the United States, roughly half of all marriages sadly end in divorce. While a decree marks the actual end, oftentimes discontent has been brewing long beforehand.
This is not limited to personal relationships, as business ties often experience difficult periods as well. Despite changing economic conditions, large scale foreclosure activity has so far failed to materialize. It’s starting to appear however that within the world of commercial real estate, we are within the preceding interval of unease.
Some $1.5 trillion of commercial real estate debt is set to mature before the end of 2025. Whereas residential real estate’s purpose is to provide shelter, commercial real estate is used for business or income-generating purposes. Malls, office towers and warehouses would all be classic examples. In a world of simultaneous low interest and vacancy rates, refinancing maturing debt is a non-issue. In 2023, things are very different.
Over the past 18 months, the Federal Reserve has increased their Fed Funds Rate eleven times, from an effective rate of 0.08 percent in March 2022 to today’s 5.33 percent. This in turn has caused borrowing costs to rise throughout the economy, from credit cards for people like you and me to loan rates for businesses looking to expand.
The result of this abrupt shift in monetary policy is that borrowers who originally obtained loans during the past 15 years of historically low borrowing costs are now faced with refinancing this maturing debt at levels which may turn a once profitable property into a money loser. In this case, securing new financing may not even be possible.