The commercial real estate market is facing a reckoning. Loans originated during the historically low-interest-rate environment of 2021 and 2022 are now coming due, and borrowers across the retail and hospitality sectors are finding that refinancing in today’s market is dramatically different from what it was three years ago.
The 2021-2022 Lending Boom
During 2021 and 2022, commercial real estate lending operated under unprecedented conditions. Interest rates were at historic lows, capital was abundant, and property valuations were rising. Borrowers secured loans with coupon rates between 3.5% and 4.7%. Many took advantage of floating-rate loans with extension options, creating vulnerabilities that became apparent as the Federal Reserve embarked on its most aggressive rate-hiking campaign in decades.
The Refinancing Reality Check
Today, borrowers face a harsh new reality. Current refinancing rates hover around 6.5% or higher, representing a 50% to 85% increase in debt service costs. A property that secured a $100 million loan at 4% in 2021 would have annual debt service of approximately $4 million. That same property refinanced today at 6.5% would see debt service jump to roughly $6.5 million annually.
Research from the National Bureau of Economic Research found that approximately 14% of all commercial real estate loans are now in negative equity. While office properties face the steepest challenges at 44%, retail and hospitality assets aren’t immune.
Hospitality’s Uneven Recovery
The hospitality sector presents a nuanced picture. Leisure travel has largely recovered to pre-pandemic levels, but business and group travel remain well below 2019 benchmarks. Gateway markets such as San Francisco and New York have struggled, while leisure-focused destinations like Las Vegas have seen rapid rebounds.
Recent data show that hotel refinancing volumes have increased, with the second quarter of 2024 marking the most active second quarter for hotel refinancings in 25 years. However, this activity is concentrated among larger, better-performing properties. The average hotel refinancing loan size increased by 54%, from roughly $10 million to $15 million, between May 2023 and August 2024, suggesting that capital is available for quality assets while struggling properties face limited options.
Retail’s Transformation Challenge
The retail sector faces mounting pressures from e-commerce, reduced urban foot traffic, and inflation. Class-A retail properties in strong locations have maintained their appeal, but Class-B and Class-C malls face existential challenges. Many lower-tier mall loans won’t be able to refinance in the current market.
Major retail closures throughout 2024, including Big Lots, Walgreens, Family Dollar, and 99 Cents Only, have weakened property fundamentals. Approximately $71 billion in retail commercial mortgages are scheduled to mature by the end of 2024, with many more coming due through 2026. Unlike hospitality, retail hasn’t seen the same refinancing momentum.
Lender Flexibility: Delaying the Reckoning
One factor preventing wholesale defaults is the remarkable lender flexibility. Banks and financial institutions have consistently chosen to extend, modify, and restructure loans rather than force foreclosures. With commercial real estate prices down 21% from their March 2022 peak, foreclosures would crystallize losses that might be avoidable if markets recover.
Regulatory pressure also encourages forbearance. Following bank failures in 2023, regulators urged financial institutions to work constructively with borrowers. By the end of 2023, more than $200 billion of real estate loans were in forbearance plans, had late payments, or were at risk of covenant breaches.
What Comes Next
Borrowers with 2021-2022 vintage loans face several potential paths: extension and modification for performing properties, refinancing with new equity injections, rescue capital from specialized debt funds, strategic default or discounted sale for deteriorated properties, or asset repositioning through fundamental property changes.
The trajectory of interest rates will play an outsized role. The Federal Reserve’s decision to begin cutting rates in late 2024 offered hope, but most analysts expect rates to remain elevated compared with the 2021-2022 period. For loans maturing in 2025 and 2026, the critical question is whether rates decline enough to make refinancing viable before lender patience runs out.
A Market in Transition
The challenges facing 2021-2022 vintage retail and hospitality loans reflect a fundamental market transition. The post-pandemic, ultra-low-rate environment has given way to a higher-rate regime that demands stronger property performance and more conservative leverage.
For industry participants, differentiation is key. Properties with strong fundamentals, capable sponsors, and adequate liquidity will navigate this period successfully. Those without these advantages face a reckoning that has been delayed but cannot be indefinitely postponed. The perfect storm will ultimately reshape the commercial real estate landscape, rewarding quality and punishing weakness in ways that may benefit the sector’s long-term health, even as it causes short-term pain.