The U.S. commercial real estate crisis is emerging. Observations suggest that about a quarter of the commercial real estate debt maturing by the end of next year will be difficult to repay.

According to a report by Bloomberg on the 31st last month (local time), real estate services firm Jones Lang LaSalle (JLL) estimated that the scale of maturing debt in the U.S. commercial real estate market, including office buildings and multi-family residential properties, will reach $1.5 trillion by the end of next year. It also analyzed that about a quarter of these debts will be hard to repay.

Analysis indicates that about 40% of the loans coming due are related to multi-family residential buildings. Particularly, those who financed the purchase of commercial real estate with 3-year floating-rate loans during the low-interest-rate period have found themselves in a vulnerable position.

The issuance of commercial real estate-related floating-rate loans in the form of collateralized loan obligations (CLOs) in the bond market is also a factor that potentially exacerbates Wall Street's concerns. It is estimated that the scale of CLOs related to commercial real estate is $80 billion.

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Following the COVID-19 pandemic, the commercial real estate market has been stagnating due to the spread of remote work and the long-termization of high interest rates. According to surveys, about 85% of North American companies have implemented a hybrid work system that combines office work and remote work. The U.S. benchmark interest rate has been maintained at an annual rate of 5.25~5.50% since last September.

As a result, even in the world-renowned Manhattan, New York, cases of buildings being sold at "low prices" have recently been exposed one after another. A 23-story building at 135 West 50th Street near Times Square, which was sold for $332 million in 2006, was sold for less than a third of that amount, $8.5 million, at an auction in July. In June, the historic Broadway building at 1740, near Central Park in Manhattan, was sold for $185 million, 70% lower than the purchase price, which shocked the market.

Furthermore, according to Moody's Analytics, the U.S. office vacancy rate in the first quarter of this year was 19.8%, a historical high.

Foreclosures are also surging. A report from Morgan Stanley Capital International (MSCI) states that the scale of foreclosed commercial real estate in the U.S. in the second quarter was $20.55 billion, a 13% increase from the previous quarter. This is the largest scale since the third quarter of 2015 ($27.5 billion), which is about 9 years ago. It is analyzed that loan institutions believe that even if interest rates decrease in the future, the office vacancy rate will be difficult to improve to the level before the COVID-19 pandemic, hence they are increasing foreclosures on non-performing real estate.

However, there are observations that if the upcoming difficulties are overcome smoothly, there will be no major issues. Katie Mackie, head of Taconic Capital Advisors, said: "Many multi-family residences are in a state of capital erosion. But over time, the asset pool has shown considerable resilience, and as long as new funds are injected, they can be repaid."