While Greater San Francisco nearly tops a national list for red flags in the struggling commercial real estate market, the San Jose metropolitan area carries daunting risk.
Landlords in Greater San Jose have 136 commercial-mortgage backed securities loans coming due this year, nearly half of which face challenges refinancing the debt, the Silicon Valley Business Journal reported. The loans carry a combined balance of $3.4 billion.
Of the maturing CMBS loans tied to offices, hotels, retail and industrial properties, 65 show signs of distress – and appear headed toward loan servicer watchlists, special servicing or designation as delinquent, in foreclosure, bankrupt or matured and nonperforming.
The balance due on the troubled loans is more than $1.5 billion, according to a Business Journal analysis.
As U.S. commercial landlords work to pay off mounting debt, with interest rates rising and values falling, those in the Bay Area carry some of the highest loan balances and distress risk.
Commercial property owners across the U.S. have hunkered down against higher interest rates, low returns-to-office by workers and tepid leasing following the pandemic.
San Francisco faces $11.4 billion in debt maturing within the next 18 months, with signs of distress on 134 loans with a balance of $1 billion, according to the San Francisco Business Times.
While San Francisco has more than three times the maturing CMBS debt, Greater San Jose — which covers Santa Clara and San Benito counties — has $500 million more in potentially troubled loans.
The San Jose watchlist includes loans tied to 38 office properties, eight apartment complexes, three hotels, two industrial sites and 14 properties deemed “other,” according to the Business Journal.
Many CMBS funds are working to extend loans, but that’s a challenge in the office sector because of property appraisals’ “shocking” declines in value, according to a Trepp researcher.
“The challenges maturing CMBS loans will face this year with higher interest rates include increased borrowing costs, potentially lower valuations and a tighter lending environment — making it more difficult for borrowers to refinance their loans,” Trepp Research Analyst Vivek Denkanikotte told the newspaper.
“There is a concern that higher interest rates could lead to lower debt service coverage ratios if the property’s income does not increase proportionally, potentially indicating a higher risk of default for the borrower,” he said.
Nationally, nearly $1.5 trillion in commercial real estate debt will mature by the end of 2025, Morgan Stanley analysts say.
New York topped the list for commercial-mortgage backed securities debt set to mature by Dec. 31, 2024, at $39.8 billion, according to the Business Times report.
Los Angeles came in at No. 2, with $17.9 billion in debt maturing within the next 18 months. It was followed by Miami with $12.6 billion, San Francisco with $11.4 billion and Las Vegas with $10.6 billion.
New York has 149 CMBS loans facing distress that have a combined outstanding balance of $2.6 billion, followed by 79 loans with a total balance of $1.5 billion in Chicago and the 134 loans with a balance of $1 billion in San Francisco.
Los Angeles followed, with more than $800 million in distressed debt.
— Dana Bartholomew
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