When the Federal Reserve raised interest rates in September for the first time since 2023, commercial real estate lenders were already knee-deep in a yearlong scrabble for deals.
Nearly two months later, through a bond-market sell-off, the Federal Reserve’s October pause and a midterm election that flipped Congress, they’re still at it. But the field has narrowed.
)
Across the U.S., lenders are cutting their margins to win loans on stabilized, cash-flowing properties. Step outside that circle and the money gets scarcer and pricier, especially for owners of office buildings, apartment complexes with floating-rate loans, and anything with debt maturing at an interest rate hundreds of basis points below the current market.
Those owners are running out of time. Over the next 12 months, office and apartment loans alone that have run out of extensions face a combined refinancing gap of nearly $19B, according to Trepp estimates shared exclusively with Bisnow.
About $16.5B of office loans packaged into CMBS hit their deadline in that stretch. Trepp assumed owners would refinance at a 7% interest rate, near the top of what new commercial mortgages cost today. At that rate, more than a third of those loans couldn’t be refinanced unless owners write checks to cover the difference, which would total about $1.9B.
Apartments face an even bigger wall. About $160B of apartment loans mature over the next year, and roughly 43% of that debt couldn’t be refinanced at today’s rates without more cash, a gap of about $17B.
Banks hold about $84B of those apartment loans and typically extend about half of what comes due, which Trepp estimates would shrink bank borrowers’ gap to roughly $5B to $11B.
The 'Food Fight'
At the top of the market, it’s a different story.
Lenders are in “a food fight for the best loans, the strong collateral,” said Stephen Buschbom, head of applied research and analytics at New York-based Trepp, which tracks the CMBS market loan by loan.
That competition is driving record-low lending margins.
“So what happens when you have more competition fighting for fewer deals? Spreads come in,” said Jason Berry, chief operating officer of Burlingame, California-based debt broker Slatt Capital.
In Trepp’s survey of mostly life insurance lenders, quoted spreads are at a record low, meaning they are accepting thinner margins and some are taking on more risk. And lenders haven’t raised their spreads since the 10-year Treasury spiked and have instead slowly trimmed them, said Andy Boettcher, Trepp's head of research. The exception is office, where spreads have edged up.
Lenders are mostly holding the line on loan terms while giving ground on price, he said. With base rates higher, even a thinner margin still beats what their own money costs. CBRE’s numbers agree: Spreads on fixed-rate commercial loans averaged 197 basis points over Treasurys in the third quarter, 23 basis points tighter than a year earlier.
Smaller loans show the same pattern. Borrowers seeking fixed-rate loans through Slatt, which mostly arranges loans under $10M, were quoted about 6.5% in the third quarter, up from 6.2% a year earlier, even though Treasury yields rose faster. Lenders absorbed much of the increase, shaving their typical markup over Treasurys to just under 2 percentage points, according to Slatt.
Not every lender is playing that game.
“While competition has increased, we have generally seen spreads remain relatively flat rather than tighten materially,” said Niraj Shah, global head of credit for real estate at Chicago-based Harrison Street Asset Management, which says it manages more than $110B. “We continue to prioritize credit quality over chasing volume.”
Still, the machine is built to keep lending. Loan originators get paid on volume, and Berry said many banks require borrowers to keep 10% to 20% of the loan amount on deposit, which makes a loan worth more to the bank than its interest rate alone.
And for the biggest banks, which have been clearing out problem loans, higher rates mean higher yields on new loans, Boettcher said. He riffed on Homer Simpson’s toast to alcohol: “The higher interest rates might be the cause of and the solution to all of banks' problems.”
Where The Money Is Pulling Back
){kind=icon}
Outside the velvet rope, the environment changes rapidly. CBRE’s index of loan-closing activity fell about 30% from the second quarter to the third.
After easing standards in the prior quarter, banks reported a net tightening on every category of commercial real estate loan in the third quarter, according to the Fed's latest survey of senior loan officers.
They also tightened lending to nonbank lenders even as demand for that financing rose. That could eventually squeeze the fight at the top, too, since many of the debt funds competing for CRE loans run on bank credit lines. Those funds and other alternative lenders made 48% of nonagency CRE loans in the third quarter, up from 37% a year earlier, while banks’ share fell to 26%, according to CBRE.
Bond buyers flinched, too. On new CMBS deals, the riskiest investment-grade bonds now pay about 5.4 percentage points over Treasurys, up from 4.8 in early September, according to Trepp's pricing desk. Issuance of conduit CMBS, which pool loans on many properties, fell to $1.6B in October from $6.5B a year earlier.
CRE collateralized loan obligations, bonds backed by the short-term loans that carry properties through renovations and lease-ups, still issued $8.7B in September and October. But those deals were lined up over the summer, Boettcher said, and many issuers are now waiting for the new year before doing more deals.
“The CRE CLOs sound more like a hard pause,” Buschbom said.
REITs, some of the industry's best credits, are borrowing less — and by choice. They sold $950M of unsecured bonds in October, down from $7.4B in July, according to Nareit data.
“When rates rise, what you'll see is that they will tap the brakes,” said John Worth, executive vice president of research and investor outreach at Nareit, the Washington, D.C.-based trade group for REITs, which together own more than 560,000 properties across the U.S.
At The Deal Table
On the ground, the rate spike sorted deals into winners and casualties, and the winners kept closing.
The deal flow at Matthews, a Nashville-based brokerage with more than 30 offices that says it has handled more than $84B in sales, shows the split in miniature. In the 60 days through Oct. 26, closings rose 18%, even as deals that fell out of contract jumped 50% from a year earlier.
The casualties were mostly buyers that hadn’t locked a rate, said Kyle Matthews, the firm’s founder and CEO. When Treasury yields jumped before they closed their loan, their projected returns shrank. In the same 60 days, deals that got a price cut after going under contract nearly doubled to 75 from 38 a year earlier. The cuts weren’t deeper, just more common.
In 2022 and 2023, many owners waited for rates to come back down. Few still expect that.
“Sellers are capitulating,” Matthews said. “They’re out of time on their loans.”
Distressed property sales rose 26.4% in the first nine months of the year, led by apartments, as owners faced the music, according to a Bisnow analysis of MSCI data.
The lenders, Matthews said, are still at the table: “We have not seen lenders pulling out of the market. ... Now, it’s more expensive, but we have competition.”
Deal cancellations at his firm climbed for about five weeks after the 10-year Treasury yield, the benchmark for most fixed-rate commercial mortgages, topped 5% this fall, its highest level since 2002. As the 10-year eased — it is just shy of 4.9% this week — cancellations fell back below prespike levels.
He called it “a temporary 45-day dislocation.”
The Squeeze
The math has stopped working for a broad swath of the industry. The borrowers left outside the fight own weaker properties, carry floating-rate debt or owe more than a new loan would cover.
That middle tier is having “a much more difficult time getting refinancing,” Buschbom said, and it is patching the gaps with loan extensions and costlier, riskier layers of financing such as preferred equity and subordinate debt. Banks are also demanding more equity from borrowers before they will modify loans.
“Floating-rate multifamily is going to feel a lot of pain,” he said.
Even Blackstone hasn’t been immune. In October, as Trepp’s survey was recording record-low spreads for the best properties, it missed the maturity on a floating-rate CMBS loan backed by apartment properties from Seattle to Bradenton, Florida, sending the loan, now $517.7M of an original $1.3B, to special servicing.
Owners that built their strategies on cheap debt feel it most.
“If you get used to 2% and you're putting on a ton of leverage at 2%, life’s really tough at 5%,” Worth said.
Delinquency rates have dropped recently, but that hides strain, too. Trepp’s CMBS delinquency rate fell to 7.9% in October from 8% in September, its highest since late 2020, but only because one $975M loan became current. Office delinquencies climbed to 12.3%.
And reaching a maturity date doesn’t mean a loan gets paid off. Nearly every CMBS loan that hit final maturity from August through October was current on its payments beforehand. Yet only 36% to 41% of each month's group had been paid off by October, according to a Trepp report shared with Bisnow.
Another $4.4B comes due this month, and Trepp estimates more than two-thirds couldn't be refinanced in full, requiring owners to put in more cash. The fixed-rate loans in that group average about 4% interest, while a new loan runs roughly 6.4% to 7.1%. That gap is the problem.
For the lenders that rescue troubled borrowers, the phone is ringing.
At Mavik Capital, a New York-based real estate credit investor with about $2B under management, the pipeline of deals to restructure or recapitalize troubled properties has roughly tripled since the summer, CEO Vik Uppal said.
The borrowers calling him now need the money rather than want it, and for them, it's “not necessarily about price, but it's about solution.”
Uppal disputed the idea that intense competition means the broader financing market is healthy.
“They want to believe what they want to believe,” Uppal said of the more traditional lenders making that case.
Those lenders face pressure from their own investors and their own lenders, he said.
“That time of extend-and-pretend is over,” he said, referring to lenders' habit of extending troubled loans rather than taking losses.
And he expects the reckoning will show up in 2027.
“It’s a slow-moving train,” he said. “But that doesn’t mean that the train wreck is not going to happen.”
)
)
)
)
)
)
)
)
)
)
)
)