Commercial Real Estate Market Faces Liquidity Crisis

The commercial real estate market has faced significant difficulties since the COVID-19 pandemic, with many companies seeking to divest themselves of office space they no longer use. The high number of sellers compared to the relatively low number of buyers has left many commercial real estate owners with substantial debt on unoccupied or low-occupancy buildings, much of which is coming to maturity. This has resulted in many analysts being concerned about the liquidity in the market, especially as lenders have tightened their pursestrings.

While many employers have tried to fight against the trend, the fact of the matter is that work-from-home policies are likely here to stay, even though the worst of the COVID-19 pandemic has long passed. This has left many commercial real estate owners with large amounts of office space they no longer need. However, there is a relative lack of people looking to purchase or rent these spaces, meaning they are often stuck with buildings that accrue heavy debt and expenses but serve little-to-no use for their businesses.

Worse still, many commercial real estate owners are struggling to pay their debts on these buildings. According to Moody’s Analytics, 4.76% of all commercial real estate mortgages are delinquent, meaning that they have missed one or more payments on the loan. While this may not seem like much, those same analyses have said that the delinquency rate could rise above 10% in coming years as more debt comes due. This is particularly concerning because there is nearly $2 trillion in commercial real estate debt expected to mature within the next two years.

Under ordinary circumstances, businesses could simply sell off the buildings to deal with the debt, but first that means finding a buyer, and that has become even harder thanks to lenders becoming more restrictive with the loans they are giving out. Lenders have received applications for around $40 billion in commercial real estate loans in 2023, about twice what they received in 2022, which would normally be a sign of a healthy market. However, lenders are only approving about 2% of all commercial real estate applications, partly due to increasingly restrictive standards, and partly due to many prospective borrowers already over-leveraged and struggling with debt.

All of this has led to a significant liquidity crisis, where commercial real estate owners are stuck with properties they do not wish to own but cannot sell, and where prospective buyers cannot get loans even when they want to purchase a property. In the worst case scenario, this could lead to a significant amount of distress as owners default on their debts and the market gets flooded with properties without prospective buyers.

However, there is no reason to panic just yet. Banks are still working to accommodate debt holders to renegotiate their terms and help them service their debts, and some equity capital is still available in many of these properties. However, the issue has become prevalent enough that it is no longer just affecting office owners, but also multi-family home owners, hotel owners, and even industrial property owners. Only time will tell if the situation can be resolved, or if the commercial market will experience a significant correction sometime in the next year or two.