C
ommercial property owners are facing a debt crisis as they struggle to refinance loans totaling $1.5 trillion due by the end of next year. A quarter of this borrowing could be hard to refinance, according to Jones Lang LaSalle Inc. The value of buildings has dropped due to higher interest rates, making it harder for landlords to borrow and forcing many to raise equity capital to secure new debt or extend existing facilities. Apartment buildings, which make up about 40% of the looming maturities, are at the center of the refinancing wave. Many US owners of multifamily properties bought these assets using three-year floating rate loans during the easy money era. Interest rate increases since then have eaten up much of their rental income, making it challenging to secure additional equity. Rising insurance costs and falling values have added to the pain, leaving about $95 billion of US properties in distress or at risk of becoming so. The looming debt maturities are also a potential headache for Wall Street after many floating-rate loans were bundled into the $80 billion commercial real estate collateralized loan obligation market and sold off as bonds to investors. However, trouble in the commercial real estate market isn't seen as a systemic issue for banks. In response to higher borrowing costs, CRE CLO lenders are modifying loans to help borrowers stay afloat until interest rates drop or additional equity can be injected or junior debt such as mezzanine loans can be secured. With the outlook for interest rate cuts becoming clearer, there's optimism that large-scale distress can be avoided in the wider CRE market. The number of lenders submitting quotes for debt refinancings has doubled on average this year, according to Matthew McAuley, a research director at JLL. The funding gap is $200 billion to $400 billion at present. Some traditional lenders are focused on working out their problem loans, while other banks, life insurers, and direct lenders are willing to extend more credit. As a result, debt funds may find fewer opportunities to deploy capital than expected, according to Willy Walker, Chief Executive Officer at Walker & Dunlop Inc.