Debt maturity in commercial real estate (CRE) continues to be a hot-button topic as we approach the close of 2024. Some projections indicate that $1.5 trillion in CRE debt is due by the end of next year.
Why we’re here:
CRE’s current debt position stems from various macroeconomic conditions, most notably the low cost of borrowing before the COVID-19 pandemic that resulted in a significant accumulation of debt as CRE companies capitalized on the low cost of capital. As interest rates began to climb post-pandemic, the concept of taking on new borrowing and refinancing existing burdens has become more complicated and less cost-effective. The interest rate environment is just one of the many factors that have contributed to the current debt bubble facing industry at large. Additionally, lending standards have tightened and banks continue to evaluate their loan portfolios in the name of risk management.
Where we’re headed:
Although predicting the future can be a fool’s errand, there are some indicators to look toward as CRE companies position themselves in the coming months. In September, the Federal Open Market Committee (FOMC) announced the lowering of interest rates by 50 basis points, marking the first reduction in four years. Federal Reserve Chairman Jerome Powell emphasized that inflation has eased from 7% to 2.2% as of August, which is much closer to the FOMC’s target of 2%. The FOMC are scheduled to meet again December 17-18 and many experts believe additional rate cuts will be announced coming out of the meetings. This would be a welcome sign for the CRE industry as discussions with their lending partners continue into 2025 and beyond.
Proactiveness and agility will become imperative for CRE companies to successfully navigate the next few years and position their portfolios for continued success. If distressed debt is heading toward foreclosure, CREs would be wise to include their legal counsel and CPAs in discussing options and transaction structuring, whether that’s planning for a forced recognition of tax gain through foreclosure activity or negotiating recapitalizations to improve a property’s loan-to-value position.
To help mitigate cash flow challenges, tax strategies to consider include:
- Cost segregations studies
- 179D certifications
- Fixed asset depreciation methods reviews and partial asset disposal elections
- Property tax appeals
About Schneider Downs Real Estate Services
The Schneider Downs Real Estate industry group provides accounting, tax and consulting services to clients nationally and internationally. Our real estate group meets our clients’ needs by providing value-added solutions in all areas of real estate ownership, including commercial, industrial, residential, multi-family, student housing, hotel and land development.
To learn more, visit our Real Estate Industry Group page.
