Approximately $528.7 billion in commercial mortgages will mature in 2023, with another $532.8 billion maturing in 2024 (Trepp). These commercial mortgage maturities leave owners with two options: stomach an interest rate double what they had or sell their property. For high-earning real estate agents seeking an investment option that helps them stabilize their finances, the current debt landscape presents an outstanding opportunity to invest in real estate.
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Understanding the Commercial Debt Landscape
How Are Commercial Loans Different from Residential Loans?
The impending maturity of a significant portion of commercial mortgages offers an opening for passive investors to access high-quality properties at a relative discount. Unlike the housing crisis of 2008, which was fraught with faulty underwriting and unqualified buyers, the current scenario comes down to pure numbers. Most commercial mortgages require substantial down payments in the 20–40% range, which acts as a safeguard against the type of drastic market upheaval witnessed in 2008.
However, unlike home loans that are amortized out to 15–30 years and paid down over that time, commercial loans are still amortized for the long-term, but are 100% due and payable after 3–7 years. This is done to make the monthly payments more manageable, with the understanding that owners will refinance or sell to pay the outstanding balance. What difference does this make?
The Implications of the Interest Rate Terrain
To understand what this means, we must point to one of the most significant factors at play. This is the dramatic increase in interest rates over a few short years, notably marked by the doubling of the 5-Year Treasury rate in 2022. The rise in interest rates has a domino effect on fixed-rate commercial loans.
How? Because commercial loans are typically set with a 5-7 year term and conclude with a substantial balloon payment, an owner looking to refinance is slapped with double their previous interest rate. Their monthly payment (debt service) will skyrocket, and they may often need to bring equity in to meet loan requirements. Without getting too far into the weeds, a refinance on a $10 million loan from a 4% interest rate to a 7.5% rate would bring monthly payments up by about $11,625 AND require a check to close of almost $1,000,000 in equity to satisfy the lender’s requirements for debt service coverage. With millions of dollars worth of mortgages coming due in the next handful of years, you can start to see the problem.
The Dilemma of Refinance or Sell
In light of these interest rate hikes, commercial property owners are faced with a pivotal decision: to refinance or to sell? A staggering 50% of commercial property owners will find themselves at this crossroads within the next five years. Opting for refinancing presents its own set of challenges, as it involves grappling with higher interest rates, which inevitably translate into increased costs and tighter margins.
What This Means for Agents Who Want To Invest
For agents who invest in real estate, the coming years promise an unprecedented opportunity to acquire commercial properties at attractive prices. However, the key to capitalizing on this wave lies in collaborating with intelligent operators, who serve as the driving force behind identifying and acquiring these properties.
1. Identify an Operator You Trust
No investment is without risk. One of the biggest factors in an investment property being successful is the operator who is behind the purchase and management. It’s critical that you find an operator with experience, a dedicated team, and a track record of success. They should dedicate time to meticulous market analysis, stay attuned to economic trends, and cultivate a robust network of brokers and lenders. These professionals are the architects behind deals that are placed under contract, and they skillfully execute business plans designed to elevate the value of properties. A skilled operator is one key to protecting your initial investment and making it hit its target return goals.
2. Embrace a Long-Term View
Much like the investment philosophy of Mr. Warren Buffett, smart investors adopt a long-term perspective in their approach. Any operator who makes promises about a get-rich-quick strategy should raise red flags. Real estate is an illiquid investment (unlike the stock market), and this means that investments take time. Look for investment opportunities that range anywhere from 3 to 10 years from the time of purchase to resale or refinance.
3. What’s Your Priority?
Why are you interested in investing in real estate? Many agents are interested in creating more income stability, getting back their time, or creating a retirement strategy that they have control over. As you review investment opportunities, keep these priorities in mind: while the allure of selling properties at a premium price is undeniable, the primary emphasis remains strong rent fundamentals that produce a steady stream of income so you can enjoy financial peace of mind!
Upcoming debt matures present High-earning real estate agents with a rare opportunity to access commercial investments at an opportune time. With nearly half of all commercial mortgages nearing maturity, the stage is set for keen operators and investors to collaborate. By adopting a long-term approach and prioritizing the generation of passive income, you can take control of your financial future and build a wealth strategy that serves you for years to come.