Retail property owners holding loans that are set to mature in this higher-interest rate environment are bracing for impact. Borrowers will feel the pain of more expensive capital and tighter credit, and pockets of distress will emerge among weaker assets. The silver lining is that there is still good liquidity in the market and lenders are willing to extend or refinance loans on good retail assets.

The commercial real estate industry is facing a wave of maturities coming due over the next few years. According to Trepp, the total volume of loans maturing between 2023 and 2027 is $2.8 trillion, half of that held by banks. The other half is spread across commercial mortgage-backed securities, life insurance companies, government-sponsored enterprises, debt funds, mortgage REITs and other nonbank lenders.

Commercial Mortgage Maturities by Lender Type

Source: Trepp Inc., based on Federal Reserve Flow of Funds Data

Although these maturities fuel concerns about the ability to access capital in a more challenging financing climate, some believe the fears are overblown. “The market is a little bit too hysterical about what these loan maturities actually mean,” said Cohen & Steers senior vice president Rich Hill, who also heads real estate strategy and research for the investment management company. The narrative in loan maturities has shifted to a view that “the sky is falling,” he said, but it is important to separate fact from fiction, he cautioned.

Cohen & Steers estimates the total outstanding commercial mortgage debt in the U.S. to be $4.5 trillion, with a rolling maturity wall that results in about 15% of commercial real estate debt coming due every year. “The market shouldn’t really be surprised that more than 40% of all loans are coming due over the next three years,” said Hill. The issue is that loans are maturing at a point in time when interest rates are significantly higher than when loans were originated, the amount of available leverage is lower and there is less availability of debt.

It also is important to note that retail is less impacted by loan maturities than other property sectors, such as multifamily and office. Some industry estimates put retail at 8% to 10% of that overall volume, or between $80 billion and $100 billion over the next two years.

Will Maturities Strain Liquidity?

It remains to be seen how the wave of maturities will be resolved in an already capital-constrained market and what the availability of financing for refinancing, acquisitions and development will be. “These loans will either have to be extended, refinanced or the assets will have to be sold,” said Richard Henry, a senior vice president in CBRE’s Atlanta office, where he arranges both debt and equity. “All of these scenarios increase volume in the system and take up lending capacity that would otherwise be there.”

On a positive note, there is still liquidity in the market for all types of commercial properties, including retail. “We do have capacity,” said Colliers director of research for U.S. capital markets Aaron Jodka. “The challenge is really going to come down to the asset-specific attributes.” How well occupied is that asset or that center? What does the near-term rollover look like? What is the relationship between lender and borrower? All of these components factor into a borrower’s ability to access capital, he added.

“Unlike the [global financial crisis], where there was very little liquidity in 2009, there is still liquidity available in the market,” agreed Susan Mello, executive vice president and group head of capital markets at Walker & Dunlop. The key difference is that debt is available at higher pricing with potentially lower proceeds and stricter underwriting standards. According to Mello, the real question is whether the more than $2 trillion in loan maturities can be refinanced at the same level of proceeds. The answer is very deal specific, depending on the property type, performance, sponsor and geographic market.

Lenders are working with borrowers to extend loans that are maturing. Although there are many different ways to structure extensions, most are being done on a short-term basis of 12 to 24 months at a higher rate, and in some cases, a lender will require the borrower to put more equity into a loan or agree to recourse. “There will be a fair amount of loan maturities that will either be refinanced or extended but not all of them,” said Mello. “There will be some foreclosures, and there will be some restructuring that goes on.”

Walker & Dunlop recently worked on a retail CMBS loan that was coming to the end of a 10-year term. The borrower ended up refinancing with a five-year CMBS loan. Although the new rate is twice as high, the term is shorter and open to refinancing after four-and-a-half years.

A common theme across property sectors is that if an owner believes a property’s fundamentals and operations are strong, it’s looking for extensions or shorter-term financing options that will get it through the current dislocation in the capital markets. “Nobody’s thinking that it’s going to be a year,” said Mello. “They want two years or maybe three years, but they want that flexibility to refi into a lower-rate environment, which people think will come; they’re just not sure when.”

Lender Appetite for Retail

Many retail borrowers are in a good position to refinance. Retail has emerged as one of the stronger property sectors. Fundamentals remain solid, as vacancies have dropped due to limited new construction. “The pandemic and the growth of e-commerce provided incredible stress tests for the sector, and we have universally heard from lenders how pleased they are with how the retail in their portfolios have performed,” said Henry.

Retail also is benefiting from capital that is shifting away from office. For example, office previously formed a bigger part of CMBS pools. Now, because people are worried about the outlook for office, lenders need to fill those pools with other property types, and they like retail because of the stronger fundamentals.

CBRE is actively working on retail financing deals with all types of lenders. According to Henry, grocery-anchored retail properties are finding the best pricing in the life insurance company space, with spreads ranging from 1.75% to 2% over the corresponding Treasury rate. “Grocery-anchored is of course the gold standard that everyone wants, but high-quality retail of all types can find competitive bids,” noted Henry. For other quality, non-grocery-anchored retail, spreads range from 2% to 2.25%. Life insurance companies typically prefer moderate leverage of up to 60% loan-to-value, though there are some that will go higher.

Another advantage for retail borrowers is that the sector has not seen the same cap rate compression as other property types. In addition, many of the 10-year loans now maturing were made on properties that have experienced significant appreciation over the past decade. That means there is an opportunity for some borrowers to take equity out of a property with a cash-out refinance, noted Hill. For example, if a borrower had a 50% LTV loan originated in 2013, after accounting for property appreciation, the effective LTV might be closer to 35% right now. “There are very real headwinds facing commercial real estate right now so it’s not as though it’s puppies and rainbows, but it’s not nearly as bad as everyone thinks it is,” said Hill.

Higher Rates Fuel Distress

The obvious hurdle is that loans are maturing in a market where capital is significantly more expensive. The 10-year Treasury is now hovering at close to 5%, compared with 2.75% in November 2013. Many borrowers face financing costs that are double, with gap financing like mezzanine and preferred equity pushing into double digits. “You can get debt; it just might not be at a level that makes economic sense,” said Hill.

Those borrowers facing bigger financing challenges are those that financed assets in 2020, 2021 and early 2022 with floating-rate debt at very high leverage levels. “Short-term, floating-rate debt has escalated dramatically, and that’s where we can start to see some of the pressure and start to see some of that distress,” said Jodka.

Among CMBS loans that are more than 30 days past due, retail reported the highest delinquency rate as of October, at 6.55%, according to Trepp. The higher-rate environment will put added pressure on properties that have been struggling to stay afloat.

Data from MSCI Real Assets shows that retail has a sizable amount of distress ahead. Although office has jumped into the lead with the largest amount of outstanding distress, at $32.5 billion, retail is trailing at a distant second with $21.3 billion. In addition, MSCI estimates that the retail sector has an additional $30.7 billion in “potential distress,” which it defines as financial stress that, if not reconciled, has the potential to become full-blown financial trouble.

“There’s been a tremendous amount of capital that has been raised that is looking for value-add opportunistic and debt strategies, which aligns pretty perfectly with what the market needs today to fix those capital stacks and these loans that are coming due,” said Jodka. The problem is that if a property has a high vacancy rate or other issues, it is difficult to generate the cash flow necessary to cover the debt service. Those situations are likely going to result in a short sale or property that goes back to the lender, he said.

Loan maturities will continue to create challenges in a market that appears to be settling into a “higher for longer” rate environment. At the same time, many see new opportunities ahead. “I think it will create some amazing lending opportunities,” added Jodka, “and it will create some really intriguing acquisition opportunities, potential generational opportunities.”