The wall of rolling commercial real estate loans is turning up the temperature in a debt market that is already feeling significant heat from higher rates and less liquidity.

Loan maturities have pushed to the forefront as a hot topic for good reason. The looming wave is substantial, with near-term maturities that represent more than 40 percent of the $4.4 trillion of outstanding commercial real estate (CRE) mortgages. According to estimates from the Mortgage Bankers Association, roughly $725 billion in commercial and multifamily mortgages were set to mature in 2023, followed by another $1.2 trillion in loans coming due over the next two years.

To put the wall of rolling maturities into perspective, it is roughly 50 percent larger than the post–global financial crisis (GFC) wall. A lot of people are looking at the volume and “freaking out” because they think it is going to create a lot of distress, says Jason Hernandez, head of real estate debt, Americas at Nuveen Real Estate. However, when you take a closer look at the volume, there are a couple of key differences in the current environment versus the liquidity crunch following the GFC, he adds.

First, there is less leverage in the system. And second, the overall value of the real estate markets today is about 80 percent higher than it was post-GFC due to price appreciation and the expansion of alternative asset classes. “There will be pockets of distress, but we don’t see the maturity wall as a sign of impending doom,” says Hernandez.

Despite a pullback from lenders, particularly the national and regional banks, many lenders are still open for business and continuing to provide capital. Lenders are refinancing loans where they can or are working with borrowers on modifications and extensions. “There’s liquidity in the market for the right deals. Borrowers have to make a decision though about what their return profiles look like and whether or not they want to absorb higher interest rates, especially if they’re long-term owners of the asset,” says Danielle D’Ambrosio, head of real estate debt asset management and servicing at Barings. Barings expected to originate more than $3 billion in new loans in 2023.

“To us, the wave of maturities is really a nuanced story across multiple geographies and asset classes,” says D’Ambrosio. “When you think about the wave of maturities, you really have to view it through a lens of which of these loans can and will be refinanced.” There is still liquidity in the market for a number of asset classes, while there is no liquidity in the market for office of almost any size and scale. “Office is not going to be the only one with challenges; it’s going to be every sector, and it’s going to be borrower and property dependent,” she says.

Maturing loans that are backed by cash-flowing assets that are doing well are not difficult conversations. It is fairly easy to extend those loans at a higher rate. The issue is when a borrower needs to inject a lot of capital into a deal, notes Bryan McDonnell, head of U.S. debt at PGIM Real Estate. “All of the hard conversations that we’re having is around, ‘Is it worth writing that check? Will I get a return on that money?’” he says.

Office is clearly on the hot seat with capital that has almost entirely disappeared. No one knows the future of the office sector, so there is a big hesitation around office deals. “‘Do I put more equity in a deal when I don’t know what my return is going to be or what that asset might trade for in three years?’ Across other sectors, as long as the fundamentals and the cash flows hold up, those properties will live to fight another day,” says McDonnell. “Office is going to be painful, and that’s where we’re spending most of our time,” he says.

Lenders would love for office loans to be recapitalized and paid down to where values have reset today, but there is not enough liquidity in the market to do that. “What you’re seeing is this push and pull with borrowers and lenders to recapitalize these business plans to make sure there is enough capital in place to execute for the next two years,” says Hernandez. If the sponsor is out of the money and doesn’t want to operate the asset, then a lender will take that asset back and operate it. A third option is the “emergency brake” that nobody wants to pull, which is to liquidate the asset with a sale, which is very difficult to do in a market where there is almost no liquidity for office other than with seller financing, he adds.

Although there is a lot of focus on the lack of liquidity for office, there are challenges in other sectors. Another trouble spot is the value-add multifamily space. Borrowers who took out floating-rate loans are struggling with expiring interest rate caps that are very expensive to replace. In addition, value-add multifamily was valued very aggressively during the past three years and leveraged to those valuations. “There also have been some overall cost increases in the operating environment that people weren’t really expecting, which is adding revenue pressure and NOI pressure in the face of a higher interest rate environment, which certainly makes those deals very challenging,” says Shawn Townsend, a managing principal of Blue Vista and the head of the firm’s commercial real estate credit platform, Blue Vista Finance.

Terms on workouts and modifications to maturing loans vary depending on the borrower, the asset and also what the balance sheet of the lender looks like. “Every workout is a bit different. You’re just trying to cut a deal. We just need to figure out the right solution,” says McDonnell.

In some cases, borrowers who have some maturity issues across their whole portfolio are going to their lender for help because they are concerned they won’t be able to service their debt anymore. “How we’ve always approached it is that we’re trying to figure out the best solution in times of stress, and almost always the collaborative approach with our borrowers has been the better play,” says McDonnell. “So, we’re starting from there saying, ‘Okay, we’re in this predicament and we’re in this relationship; let’s put cards on the table and figure out how to solve it.’”

Although some owners may be forced to sell ahead of a loan maturity, the market is still trying to figure out where values have reset. “2024 is where we will see more decisive action in whether owners decide to liquidate parts of their portfolio to strengthen balance sheets or reinvest in assets,” notes Townsend. “We are still very early in the process, and I think 2024 is when people are going to start making more of those decisions.”

Beth Mattson-Teig is a freelance writer based in the Minneapolis area.