Commercial Real Estate Market Update: The Imminent Wave of Commercial Debt Refinance

There is growing attention on the volume of commercial debt that is due to be refinanced in the coming 18 months and the potential impacts it could have on the Commercial Real Estate market.

Over the past decade, Commercial Real Estate borrowers have been able to take advantage of historically low interest rates and have secured significant debt. As these loans near their maturity dates, borrowers will need to refinance or pay off their existing debt.  Estimates show that a substantial volume of Commercial Real Estate debt, amounting to billions of dollars, is coming due for refinancing over the next 18 months.

This wave of refinancing poses both Challenges and Opportunities for Commercial Real Estate investors:

Challenges:

• Potential tightening of lending conditions during the refinancing process. As borrowers seek new loans, they may encounter higher interest rates, stricter underwriting requirements, and more cautious lenders.
• Difficulty for some borrowers to secure favorable refinancing terms, leading to potential liquidity constraints and distress.
• The volume of debt coming due could put pressure on the availability of credit and strain the financial system. If lenders become inundated by an influx of refinancing requests, it may lead to delays, increased scrutiny, or even a reduced capacity to extend credit.

Opportunities:

• Those with access to capital and a strong financial position can take advantage of potentially distressed situations and acquire properties or portfolios at more favorable terms.
• Distressed borrowers who are unable to refinance their existing debt may be forced to sell properties, creating potential investment opportunities for well-positioned investors.
• The refinancing process provides an opportunity for borrowers to reassess their portfolios, optimize their capital structures, and adjust their investment strategies.
• It may prompt property owners to explore alternative financing options, negotiate better terms, or even divest underperforming assets to strengthen their financial positions.

As the refinancing wave unfolds, it is essential for Commercial Real Estate investors to assess their own debt maturity profiles, evaluate refinancing options in advance, and maintain open lines of communication with lenders to navigate the evolving market conditions successfully.

Here are four steps the Harwood Commercial Group can help you take today to best position your commercial debt in the current financial situation:

1. Conduct a Comprehensive Portfolio Review: We start by thoroughly reviewing your Commercial Real Estate portfolio, evaluating each property’s performance, cash flows, and debt obligations. We identify any underperforming assets or those with upcoming debt maturities that may require refinancing. This review will help you understand your current debt exposure and enable you to prioritize actions accordingly.

2. Engage in Proactive Communication with Lenders: Investors should establish open lines of communication with current lenders, to discuss your portfolio and the upcoming refinancing needs. It’s crucial to share your financial position, property performance, and any proactive measures you have taken to mitigate risks. By maintaining a transparent and collaborative relationship, you can work together to explore refinancing options, negotiate favorable terms, or develop alternative strategies to address potential challenges.

3. Consider Diversifying Funding Sources and Explore Alternative Financing Options: In the face of tightening lending conditions, it’s prudent to diversify your funding sources and explore alternative financing options. Look beyond traditional banks and consider private lenders, non-bank financial institutions, or debt funds. These alternative sources of capital may offer more flexibility and may be more receptive to Commercial Real Estate investments.

4. Prepare a Strong Refinancing Strategy: Develop a well-thought-out refinancing strategy based on your portfolio review and market conditions. Consider refinancing properties ahead of maturity dates to proactively manage potential liquidity challenges. Work with financial advisors and consultants specializing in Commercial Real Estate to help navigate the refinancing process effectively. Commercial Real Estate Market Update: The Imminent Wave of Commercial Debt Refinance

To discuss your Commercial Real Estate Investment Strategy: Teresa Harwood   tharwood@kw.com   (317) 354-5236