Michael Lewitt on commercial real estate loans coming due

Even more concerning is what will happen as commercial real estate loans mature and have to be refinanced at much higher rates.  Chris White at Loop Capital noted this morning that there are $147 billion of real estate loans coming due over the next 12-24 months with an average coupon of 4.3% while the current prime rate is 8%.  Rates may decline by the time these loans come due but will certainly remain at least 200-300 basis points higher than the original loans.  Many projects that penciled out in ZIRP are not economic anymore.  Many experts are forecasting loss rates of as high as 40% on commercial real estate based not merely on higher interest rates but lower utilization rates of urban (and even suburban) office buildings.  Commercial real estate was a major participant in the ZIRP/QE bubble and is now experiencing a painful and expensive adjustment as that bubble deflates.  A city like San Francisco, for example, is directly in the bullseye of higher rates, a tech bust, and the physical destruction of the urban environment.

~ Michael Lewitt, "Chasing Our Tails," The Credit Strategist, March 27, 2023