Stalling for Time: The Impact of Interest Rate Uncertainty on Commercial Real Estate

The world of commercial real estate is currently facing a series of delays and uncertainties, largely due to the Federal Reserve's unclear stance on when, or if, rate cuts will occur. Loans reaching maturity are being extended as borrowers and lenders wait for potentially lower rates that could make refinancing easier. However, this wait-and-see approach is only increasing uncertainty in the sector.

MSCI Real Assets reported that in 2023, $214 billion in loans that were supposed to mature were neither refinanced nor sold. They estimate that as much as $870 billion in mortgages tied to assets in their database could come due in 2024. Other research sources have made similar findings, with Autonomous Research estimating that 40% of bank CRE loans maturing this year are actually holdovers from 2023.

These extensions provide more time to work out refinancing solutions, but all of this activity is based on the assumption that rates will go down, enabling refinancing that allows everyone to walk away unscathed. However, history teaches us that pushing problems off into the future often results in paying compound interest, frequently in the form of widespread issues that can become disasters.

Property prices have already fallen, and cap rates have increased. There is a growing call for the commercial real estate sector to face these challenges head-on before the situation worsens. While prices may drop further and banks may see their loan portfolios take a hit, the alternative - waiting for everyone else to act - could result in a tsunami of pain affecting all parties.

Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs), offer a unique lending option for pre-stabilized commercial real estate projects. This program allows borrowers to secure a permanent loan for their project even before it has reached stabilization, providing a valuable financing solution in today's uncertain market. By locking in a long-term, fixed-rate loan at the outset, developers and investors can mitigate the risks associated with future interest rate fluctuations and refinancing challenges. This forward commitment from the GSEs enables borrowers to plan their projects with greater confidence, knowing that they have a reliable source of permanent financing in place. To qualify for this program, projects must meet certain criteria set by Fannie Mae and Freddie Mac, ensuring that the GSEs maintain their commitment to supporting sustainable and responsible real estate development. If this may be a fit for you, give us a call to discuss your project.