Welcome to the CRE News Digest from First American Title NCS, where we explore the biggest stories in commercial real estate. As a legacy brand working in CRE for more than 120 years, First American keenly knows the market and the forces that are impacting our clients’ businesses.
Big Picture: Transactions and Maturing Debt
Looming debt maturities in the commercial real estate industry continue to be top of mind among industry experts when exploring the state of the market. In his recent analysis, First American Senior CRE Economist Xander Snyder examines the relationship between the current dip in CRE transactions and the industry’s upcoming debt maturities to better understand how and when transaction volume may pick back up.
The low-interest-rate environment that followed the global pandemic led to all-time CRE transaction volume highs, meaning a decline seemed to be inevitable. However, the decline in transaction volume in the first quarter of 2024 compared to pre-pandemic figures was substantial, about a 57 percent decline. While the industry waits for a recovery, Snyder and other experts believe that the quantity of CRE mortgages maturing this year and into 2025 will allow CRE transaction volume to grow once again by narrowing the outstanding price expectations gap between buyers and sellers.
According to the Mortgage Bankers Association , an estimated $930 billion in CRE mortgages will come due in 2024, and with little to no indication of rate cuts in the near future, many owners will be forced to refinance at meaningfully higher interest rates or sell their properties at a price reduction. Plenty of buyers are looking to purchase properties being sold by force due to maturing loans, overall raising CRE transaction volume. Additionally, whatever effect this maturing debt will have on banks has been a frequent topic of conversation within the industry. However, this impact of these maturing loans will stretch beyond banks, Snyder explains, as over 60% of CRE loans outstanding are held by non-bank entities. These entities vary in risk tolerance and flexibility, allowing some properties reaching debt maturity to be more easily refinanced and others more likely to face distress or foreclosure.
While CRE price adjustments and debt maturity pains have been felt throughout the industry already, there is still more to brace for, and it will not come quickly. Snyder estimates that the full impact of 2024’s maturing debt may not be felt until the first half of 2025 because of the slow pace of managing and restructuring distressed debt.
State of the Sector: Office
The office sector is still struggling to adapt to a post-pandemic world with reduced tenant demand. According to Moody’s, the office sector closed out 2024’s first quarter at a 19.8% vacancy rate, surpassing historic peaks in 1986 and 1991. Yet office rent is not consistently falling, and in some areas is even rising. In the CRE industry, rent acts as a metric that indicates the value of a property to lenders and other key players. Lowering rent by too much can decrease cash flow which could potentially lead to a default on a loan. However, with remote and hybrid work here to stay, experts expect rents to drop eventually due to this maturing debt from high vacancy rates; sales and foreclosures caused by rent maturities will adjust rent prices to reflect the market conditions.
Office vacancies are affecting more than just the office sector and go beyond the CRE industry altogether. As reported by BBC, small businesses in office districts across the country are struggling with the “new normal” of vacant offices. Jimmy Yavrodi, a local restaurant owner in New York City, explained that his business is dependent on office employees stopping in for meals on a typical workday and has already seen a 70% decline in sales since 2020. “If they don’t come to work,” he said, “places like us can’t survive.” While many companies are introducing back-to-office orders, slowly filling bits of office space and bringing back employees, it is not enough to sustain retail businesses long term in office districts with already high rents.
Innovation: New SEC Emission Reporting Standards
In March, the Securities and Exchange Commission (SEC) approved rules that require large corporations to report part of their carbon emissions, with Scope 3 emissions reporting excluded from the requirements. The rules also require climate risk disclosures to be included in all SEC filings. Under this ruling, major landlords and CRE operators will be required to report their Scope 1 and Scope 2 emissions, which include emissions released from direct and indirect action, such as burning fuel to heat a building and electricity usage, respectively.
The omission of Scope 3 emissions reporting comes as a relief to the CRE industry because of the difficulty in defining what these emissions are. Scope 3 emissions include indirect emissions regarding the carbon footprint of a company, and for CRE corporations, this refers to embodied carbon from building construction and demolition. While the exclusion of Scope 3 emissions has been controversial, it simplifies the reporting process for CRE corporations as it avoids tenant-operated emissions.
Overall, the SEC ruling highlights the growing importance of environmental and climate-related disclosures within the CRE industry, specifically for landlords and investors.
