Brace for more pain in commercial real estate as a mountain of debt comes due

The rapid rise in interest rates has been hard on commercial real estate, especially the office sector, already staggering under the blows of the pandemic.

Now a new threat looms as hundreds of billions of dollars in loans reaches maturity over the next few years, says a new report from TD Economics.

Make no mistake, this is not just the United States’ problem. Troubles in the U.S. CRE market that hit lenders in recent weeks such as New York Community Bancorp have spread to Japan and Europe, raising fears about broader contagion.

Shares in German lender Deutsche Pfandbriefbank AG fell to a record low today after it was downgraded by S&P Global Ratings over its high exposure to the U.S. commercial property market. The German company has described the current turmoil as the “greatest real estate crisis since the financial crisis.”

An estimated US$540 billion in commercial real estate loans in the United States will come due this year and another US$535 billion next, says the report by Toronto Dominion economist Admir Kolaj.

Meanwhile, market fundamentals are deteriorating fast, with offices the most vulnerable sector.

Office properties have been struggling since the pandemic ignited the work-from-home movement. Even though employers are increasingly pushing to get their workers back to the office, remote work days still remain high at 30 per cent, far above the 5 to 7 per cent before the pandemic, said Kolaj.

Companies might not get rid of their offices entirely, but they are downsizing when leases expire. CoStar estimates that office tenants gave back about 65 million square feet of space last year.