The decline in property values is taking a toll on private lenders, leading a global ratings agency to downgrade two major commercial property loan originators this week.

S&P Global Ratings downgraded Blackstone Mortgage Trust from BB- to B+ based on concerns about its asset quality after the firm reported that it had $1.9B in impaired loans on its books at the end of 2023, up from $900M a year earlier.

The mortgage REIT, which trades on the New York Stock Exchange as BXMT, pumped up allowed credit losses from $343M to $592M. S&P researchers said BXMT's loans are 36% concentrated in office properties, the highest among real estate finance firms it rates.

Beyond the impaired loans, BXMT also held 15 loans totaling $2.7B in book value as of year’s end with an internal risk rating of 4, which is indicative of a high risk for the potential principal balance loss, according to the report.

S&P's outlook on BXMT is stable, which the agency attributed to its $1.7B in liquidity, which should allow it to avoid forced asset sales and maintain distributions to investors.

“Over the course of 2023, BXMT increased liquidity to near-record levels and reduced leverage while maintaining strong earnings — results that demonstrate the resilience of the business model amidst a challenging backdrop,” A Blackstone spokesperson said in a statement. “Looking ahead, we are well-positioned to strategically manage our portfolio while capitalizing on emerging opportunities.”

S&P also lowered Claros Mortgage Trust's rating from B to B- and revised its outlook on the firm's credit to negative after its liquidity dropped by more than half in less than six months.

Claros, a mortgage REIT managed by Mack Real Estate Credit, saw its liquidity fall from $433M on Sept. 30 to $214M on Feb. 16, according to S&P.

The firm has already been forced to sell some of its loans at discounts to generate cash, and S&P noted it had $433M in unencumbered loans and $147M in unencumbered real estate owned at the end of 2023 which could be liquidated to shore up its balance sheet.

“We expect that CMTG will opportunistically conduct asset sales to enhance its liquidity, which could result in losses if the loans are sold at a steep discount to par,” S&P analysts Vincent Fu and Gaurav Parikh wrote in the report.

The firm also reduced dividend payments to investors to shore up liquidity and avoid tripping internal covenants. Claros officials did not return emails seeking comment.

A Claros spokesperson declined to comment.

S&P also revised its outlook of KKR Real Estate Finance Trust to negative on Thursday while reaffirming its B+ rating. The dimmer outlook is a result of the firm's declining asset quality. The company wrote off $74M last year and had $210M in allowance for credit losses, up from $107M in 2022.

A KKR spokesperson declined to comment on the decision.

S&P's revisions come as the industry reckons with the $4.5T wall of CRE loans on lenders’ books, 60% of which are due in the next four years, according to the Mortgage Bankers Association.

“In our view, rated CRE lenders are likely to see asset quality deterioration as more loans move toward maturity, likely pressuring operating performance,” S&P analysts wrote in the report. “For rated CRE lenders, we've seen a rise in real estate-owned properties, and that will continue to create a liquidity need.”

Also on Wednesday, S&P affirmed its ratings and outlooks on Ladder Capital Finance Holdings and Starwood Property Trust and left unchanged its outlook on Appollo Commercial Real Estate Finance.

“We believe [these firms] are better positioned to navigate through the difficult conditions,” S&P analysts wrote.