Boston-headquartered manager AEW has been closely monitoring the debt funding gap in Europe since September last year.

Then, it published initial analysis pegging the shortfall between the amount of debt due to be repaid at loan maturity and the amount of new debt available to repay it in the region’s main markets of the UK, France and Germany at €24 billion between 2023 and 2025.

A few months later in January, the manager updated its forecast to €51 billion, citing the impact of higher LTVs at refinancing as well as lower interest rate coverage ratios on the amount of refinancing capital available from lenders.

Since then, the cost of debt for real estate has risen exponentially. Expectations of a slowdown in rate hikes earlier in the year were not met, with persistent inflation causing the Bank of England and the European Central Bank to further raise interest rates to 5.25 percent and 3.75 percent, respectively.

Against a backdrop that surpassed expectations, AEW this week published another revised estimate for the debt funding gap in Europe.

The total of €93 billion seems concerningly large at first glance. But it comprises an expanded scope in terms of both geography – the Netherlands, Italy and Spain have been added to the calculation – and timeframe, with maturities included from 2023 to 2026 instead.

Although these caveats render the revised figure incomparable directly with its predecessors, the alterations themselves provide a noteworthy snapshot of lender sentiment as we move into the back half of the year.

Indeed, as Hans Vrensen, head of research and strategy at AEW, told affiliate title Real Estate Capital Europe, the decision to keep 2023 maturities in the analysis and extend it to 2026 was because “we don’t believe loans originated in 2018 have really all been refinanced in the typical manner this year.” He said that rather than new loans originated, many existing loans have been extended.

Vrensen said lenders are extending for one or two years, keeping the existing LTV in place, “but given that rates have moved up, lenders are resetting the interest rates by requiring a new interest rate swap or cap be bought at loan extension.” Extending is not pretending this time around.

While this trend toward extension reflects the struggles among borrowers to refinance in a higher-cost and lower-value environment, as well as an unwillingness among lenders to force borrowers to repay loans and thus trigger distress on their books, it also suggests lenders can see the light at the end of the tunnel.

Whether rates have yet peaked, or how much higher they may need to go to tame inflation is, of course, unknown. But economists expect central banks to slow hikes in the latter half of the year. This is supported by AEW’s research that shows all-in borrowing costs for commercial real estate in euros have begun to stabilize below 5 percent since February. Euro swap rates are also stabilizing just above 3 percent.

Interest rates may stay ‘higher for longer,’ but such clues suggest they will stabilize in a lower range than they currently are to get capital markets moving again. And when rates come down off their peak, lenders will be more likely able to refinance, subsequently closing the gap that looms ominously over European real estate. As the context surrounding AEW’s latest debt funding gap research suggests, they are willing to sit on current issuances until they reach that light at the end of the tunnel. And that feels like a note of optimism for the market.