The Potential Coming Commercial Real Estate Crisis

  • Dallas REIT Ashford Hospitability is giving back 19 hotels to lenders.
  • We are likely to see more of this type of voluntary surrender to lenders in the next couple of years.
  • But that could provide opportunities to investors.

Like many of you, it seems like all we talk about these days in work circles is the likely and looming commercial real estate crisis. It is a very hot topic around the water cooler. Indeed, a week ago I did a presentation to a group in Dallas about this very topic. And after I was done, I figured it would make a good blog topic.

And then, some pretty unfortunate news came out of Dallas that furthered my interest in this topic. So that’s what we are going to talk about this week – where are we headed in the next 18 to 24 months in commercial real estate? Does anyone know?

Dallas REIT Gives Back Hotels

It is a nervous time in the commercial real estate world for developers, investors, lenders – just about everyone. There are a lot of articles written and conversations had about a potential collapse on the horizon.

Last week came news out of Dallas that is sure to further entrench that position. Dallas REIT Ashford Hospitality announced that it was giving back 19 hotels across the United State to its various CMBS lenders.

This decision comes after the hotels failed to reach their debt yield ratios. And apparently when it marketed them for sale, Ashford was unable to get any offers that were above the debt. As a result, it makes more sense for it to return the properties to the lenders rather than keep the properties and get them in good standing. Indeed, that would have required Ashford to pay down approximately $255 in debt on the 19 properties.


We Could See a lot More Commercial Real Estate Properties in Trouble

The trouble that these Ashford properties are in is exactly the type of trouble we have expected to see coming in the commercial real estate industry. There seems to be a combination of bad factors that could lead to an avalanche of failures.

First is the oncoming expiration of debt. There is approximately $1.5 trillion in commercial real estate debt coming due by the end of 2025. Approximately $270 billion of that will come due in 2023. Much of this is the result of a lot of short-term debt that was used to purchase properties in the boom times of the mid to late 2010s. Now a lot of that is about to come due.

The problem, of course, is that the are not a lot of choices for refinancing that debt. A lot of lenders have left the market and are not looking to take on any more commercial real estate debt. And, as you know, the fed has increased the interest rates continuously for the last 18 months. Thus even if owners can find a lender willing to lend, the interest rates are likely to be significantly higher than the original debt was. And these higher rates can potentially kill the economics of a deal.

In addition, some of the market dynamics for commercial real estate have shifted. I wrote last week about the decrease in multifamily rental rates in the Austin market. Obviously lower rates have a negative effect on the viability of a deal.

In addition, the office market has changed significantly since the start of COVID. Remote work has taken the US by storm. And while many companies want their employees to come back to work, there is no guarantee that is going to happen. As a result, companies appear to be requiring less space and office vacancies have increased. According to a friend at CBRE, in Dallas at the end of the first quarter of this year, office vacancy was up to 24.5%. And office sublease space has increased significantly.

So what does this all mean? What does it say for the near future of commercial real estate? I’m not sure I’m completely qualified to answer that question. But it does not look great. It sure seems like we are in for a rough couple of years.

But that’s not all bad, of course. Downturns also present significant investment opportunities. So if you can weather the storm, there may just be some great prospects out there to uncover.

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