CRE Analyst Dec 23, 2024 8:00:00 AM

CRE Maturity Wall vs. Historical Default Trends: Key Insights

'Maturity wall' narrative vs. default research...

----- Narrative -----

Commercial real estate maturity wall $950B in 2024, peaks in 2027

"Rate hikes by the Federal Reserve and changes in post-pandemic behavior have put pressure on commercial real estate (CRE) borrowers needing to refinance loans coming due. The tally is nothing to sneeze at, with approximately $950 billion in CRE mortgages set to mature in 2024..."

"Should borrowers fail to seek the necessary refinancing and default on their loans, banks would not only face losses on their loans but valuations in the CRE market could come under significant pressure. Origination data shows that maturity wall will grow to nearly $1 trillion in 2025 and ultimately peak in 2027 at $1.26 trillion, suggesting that the issue is unlikely to resolve soon."

(Source: S&P)

----- Research -----

The bedrock longitudinal study of commercial mortgage defaults was driven by Howard Esaki of Morgan Stanley.

Here's what Esaki and his peers found regarding the timing of defaults:

"On average, the annual default rate was low within the year of loan origination, rose to about 1% in the first year following origination, then jumped to a range of 1.5% to 2.7% for the next six years. Default rates then declined to less than 1% for the next three years, and tailed off gradually. These results are nearly identical to the Esaki (2002) study. As in that study, THERE IS NO SPIKE IN DEFAULTS AT BALLOON DATES. Some research analysts have noted that loan restructures result in the appearance of low default rates in balloon years, but there is no evidence to support this in our study."

"The default timing pattern for individual cohorts can vary widely from the average. The timing and total defaults of a cohort are highly dependent on its position in the real estate cycle. For almost all cohorts, however, the peak in defaults is in years three through seven after origination."

Which approach will define performance: 'maturity wall' or historical experience?

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