Commercial property (CRE) is navigating several challenges, varying from a looming maturity wall needing much of the sector to refinance at higher rate of interest (commonly described as "repricing threat") to a wear and tear in total market fundamentals, including moderating net operating income (NOI), increasing jobs and declining appraisals. This is especially true for office residential or commercial properties, which deal with additional headwinds from an increase in hybrid and remote work and distressed downtowns. This post provides an overview of the size and structure of the U.S. CRE market, the cyclical headwinds arising from greater rates of interest, and the softening of market fundamentals.

As U.S. banks hold approximately half of all CRE debt, dangers associated with this sector remain a challenge for the banking system. Particularly among banks with high CRE concentrations, there is the potential for liquidity issues and capital deterioration if and when losses emerge.
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Commercial Realty Market Overview

According to the Federal Reserve's April 2024 Financial Stability Report (PDF), the U.S. CRE market was valued at $22.5 trillion since the fourth quarter of 2023, making it the fourth-largest asset market in the U.S. (following equities, residential property and Treasury securities). CRE debt exceptional was $5.9 trillion since the fourth quarter of 2023, according to quotes from the CRE data company Trepp.

Banks and thrifts hold the biggest share of CRE debt, at 50% as of the fourth quarter of 2023. Government-sponsored business (GSEs) account for the next largest share (17%, mostly multifamily), followed by insurance coverage business and securitized debt, each with approximately 12%. Analysis from Trepp Inc. Securitized debt includes commercial mortgage-backed securities and property financial investment trusts. The remaining 9% of CRE debt is held by government, pension, financing companies and "other." With such a large share of CRE debt held by banks and thrifts, the potential weak points and dangers related to this sector have actually become top of mind for banking managers.

CRE lending by U.S. banks has actually grown significantly over the past decade, rising from about $1.2 trillion impressive in the first quarter of 2014 to approximately $3 trillion outstanding at the end of 2023, according to quarterly bank call report data. An out of proportion share of this development has occurred at regional and neighborhood banks, with roughly two-thirds of all CRE loans held by banks with assets under $100 billion.

Looming Maturity Wall and Repricing Risk

According to Trepp price quotes, approximately $1.7 trillion, or almost 30% of arrearage, is expected to mature from 2024 to 2026. This is commonly described as the "maturity wall." CRE debt relies greatly on refinancing