Deep Dive: Private real estate’s refinancing challenge

It could not have come at a worse time. After a year of rapidly escalating interest rates and decades-high inflation, the private real estate industry is now bracing for an onslaught of loans coming due over the next five years.

“That’s the biggest thing on everybody’s mind right now,” says David Boyle, co-founder and managing partner of London-headquartered NW1 Partners. “This is coming to the top of issues for everybody.”

At Savills’ Financing Property 2023 event in London in May, Nick Harris, head of UK and cross-border valuations at the London-based real estate services company, spoke about the confluence of factors making refinancing one of the industry’s top challenges: “The fact that significant volumes of debt are due to be repaid is not at all unusual. But what is different at this juncture is that these loans are being refinanced against the backdrop of falling capital values, rising debt costs and the potential impacts around the ESG requirements.”

In the US, the world’s largest real estate market, “refinancing risks are front and center,” a team of equity analysts from Morgan Stanley wrote in an April report. Of the approximately $4.5 trillion of outstanding US commercial real estate debt, nearly a third – up to $1.46 trillion – is coming due before year-end 2025. 

“Front-loaded” loan maturity walls represent just one of a “trifecta” of refinancing risks identified by the New York-based investment bank. The other risks include US commercial real estate’s heavy reliance on banks, both as direct lenders for assets as well as buyers of both agency and non-agency commercial mortgage-backed securities, and growing valuation concerns in sectors such as office and retail, where a 30-40 percent peak-to-trough correction is anticipated.

Refinancing risks are generally less significant outside the US. In Europe, for example, borrowers are not expected to see a significant reduction in the availability of bank financing, partly because banks in the region have lower exposure to commercial real estate compared to those in the US. 

That said, banks in Sweden, Germany and Ireland have come under scrutiny for their higher exposures to commercial real estate or more elevated default risks. Also, higher debt costs are expected to result in refinancing shortfalls for many assets in Europe this year, particularly office and retail in the UK and Germany, the report said. Signs of refinancing distress in the region have also been emerging, among them New York-based sector heavyweight manager Blackstone’s default in February on a securitized loan for an office and retail portfolio in Finland. 

Borrowers with stretched capital structures can tap into a range of refinancing options, according to London-based adviser Savills Capital Advisors. Well-capitalized property owners can internally fund a refinancing with an additional equity injection, while external and alternative funding options include mezzanine debt and preferred equity. In more stressed or distressed situations, the sponsor may relinquish partial control of the asset through a ground rent strip or a minority stake sale, or give up the asset entirely via a straight sale. 

For this month’s cover story, PERE spoke with a dozen borrowers and advisers in the US, Europe and Asia-Pacific about their varied approaches to tackling the wall of loan maturities while the real estate financing market remains in upheaval. The answers, as we learned, were far from predictable.