Bloomberg, citing real estate services firm Jones Lang LaSalle (JLL), reported on August 31st that the amount of debt maturing in the U.S. commercial real estate market by the end of next year is estimated to reach $1.5 trillion.

JLL analyzed that about a quarter of these loans may face difficulty in refinancing.

The downturn in commercial real estate has recently become more apparent as a serious issue.

The ongoing normalization of remote work post-COVID-19 has sharply reduced office demand, and the prolonged period of high-interest rates has significantly increased interest burdens, which are key factors contributing to the commercial real estate slump.

This decline in office demand has led to rising vacancy rates in the office market and reduced rental income, making it difficult for property owners to repay loans.

According to Jones Lang LaSalle, as of the second quarter of this year, the average office vacancy rate in the LA County real estate market was 27.7%, up 1.9 percentage points from 25.3% in the second quarter of 2023, approaching 30%. The increase in vacancy rates is being accompanied by the deterioration of office building owners’ finances, including bankruptcies. In Wilshire Center, which includes the Mid-Wilshire area of LA’s Koreatown, the vacancy rate rose from 33.0% in the second quarter of 2023 to 36.2% in the second quarter of 2024, an increase of 3.2 percentage points, entering the mid-30% range.

Property owners who borrowed money at low interest rates in the past are now facing the challenge of refinancing at much higher interest rates as their loans mature.

Real estate industry experts expect that the office market will continue to experience high vacancy rates, with rental prices either stagnating or declining due to the impact of COVID-19. They also predict that there will be a significant increase in defaults or distressed sales of real estate if office property owners are unable to make loan payments or qualify for refinancing.

Notably, JLL estimates that approximately 40% of the maturing loans are related to multifamily buildings, which constitute a major portion of the upcoming refinancing needs.

These multifamily loans were primarily financed through adjustable-rate loans with a typical three-year term during the low-interest-rate period. However, with rising interest rates over the past three years, loan interest payments have increased significantly, making it difficult for borrowers to raise additional capital, Bloomberg reported.

The issuance of commercial real estate-related collateralized loan obligations (CLOs) in the bond market is another factor that could potentially amplify concerns on Wall Street. Bloomberg reported that the volume of commercial real estate-related CLOs is around $80 billion.

However, some experts believe that if capital can be raised to navigate the upcoming challenges, there may not be significant issues.

Kathy McKee, a managing director at Taconic Capital Advisors, stated, “Many multifamily properties are experiencing capital erosion. However, given the resilience of this asset class over time, refinancing should be feasible with the infusion of new capital.”



<Hwandong Cho>