T
he commercial real estate market is facing significant challenges due to post-pandemic behavior and rising interest rates, which will lead to higher defaults for many borrowers. However, the impact will vary across asset classes and may take longer to materialize than expected. S&P Global Market Intelligence's report, "Commercial Real Estate Outlook: Weathering the Storm," examines how insurers, banks, and regulators are responding to concerns over potential stress in the CRE market.

    The report highlights recent investment activity from life insurers in the CRE market and forecasts future loss content for banks from the CRE segment. It also notes that publicly traded REITs can provide insight into market conditions due to their daily trading. "Commercial real estate borrowers will face a tough year as they seek to refinance maturing loans," said Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence. "Defaults are likely to increase, particularly in the office segment, but not all CRE loans will be equally affected."

    Key findings from the report include:

    * Banks with high CRE exposures have faced scrutiny from regulators and investors.

    * Banks will experience pain in their CRE books as borrowers struggle to access credit or face higher debt service due to rising interest rates.

    * Approximately $950 billion of CRE mortgages are set to mature in 2024, carrying rates nearly 200 basis points below those originated this year.

    * Office REITs continue to trade at significant discounts to their estimated net asset value estimates, but valuations have improved from the low point in 2023.

    * Life insurers' holdings of mortgage loans have reached record highs in 2024 despite asset quality concerns.