How Investors and Brokers Can Navigate the Upcoming CRE Debt Cliff

Understanding the CRE Debt Cliff

The commercial real estate (CRE) industry faces a looming “debt cliff” as an unprecedented volume of loans come due in the next few years. Roughly $950 billion in CRE mortgages are set to mature in 2024, with nearly $1 trillion due in 2025 and a peak of about $1.26 trillion in 2027  . Many of these loans were originated at low interest rates and now face refinancing at much higher rates. Coupled with post-pandemic shifts like remote work (which has softened office demand) and tighter lending from regional banks, the stage is set for a potential wave of distress in the CRE market.

For investors and brokers, this debt wall presents both challenges and opportunities. On one hand, property owners with maturing debt may struggle to refinance, leading to defaults or urgent sales. On the other, well-prepared investors can find attractive deals on quality assets sold at a discount. Below, we explore key strategies to navigate this environment:

• High volumes of maturing debt: Be aware of the timeline – a cumulative ~$1.5 trillion in CRE loans are due by end of 2025 , which could strain many owners.
• Refinancing hurdles: Interest rates are at decade highs, dramatically increasing debt service costs. Many properties’ cash flows may no longer cover new loan payments at current rates.
• Declining valuations: Property values (especially for offices and older retail centers) have fallen, in some cases by 30-40%, eroding equity. An estimated 14% of CRE properties are in negative equity, owing more than they’re worth.
• Bank caution: Lenders – particularly regional banks – are pulling back. Some banks are selling loan portfolios at discounts to reduce exposure, while others opt to extend loan terms (“extend and pretend”) rather than foreclose.

Opportunities Amid Distress

The debt cliff doesn’t just spell trouble – it also signals opportunity for those ready to act. Investors with capital on hand, and brokers who know where to look, can capitalize on several emerging trends:

Distressed Asset Acquisitions

Many owners facing loan maturity and unable to refinance will look to sell quickly, potentially at a significant discount. This creates an opening to acquire distressed assets at bargain prices. These may include office buildings with high vacancy, hotels still recovering from pandemic lows, or retail centers losing major tenants. By purchasing below intrinsic value, investors can reposition the property or hold until the market recovers, potentially realizing outsized gains.

• Due diligence is critical: When targeting a distressed property, thoroughly evaluate its fundamentals. Is the location still strong? Are there viable tenants or uses for the space? Understand why the asset became distressed – was it purely macroeconomic (high interest rates) or are there deeper issues like functional obsolescence or mismanagement?
• Plan the turnaround: Have a clear business plan for the asset. This might involve leasing up vacant space, investing in renovations, or changing the property’s use. For example, a poorly occupied office building downtown might be a candidate for conversion to apartments (more on conversions below).
• Secure financing or cash: Traditional lenders may be hesitant to finance highly distressed deals. Investors should line up alternative financing (private equity, mezzanine debt, or hard money loans) or be prepared to pay cash. Factor in higher financing costs and ensure the purchase price reflects those costs and risks.
• Leverage marketplaces: Use online platforms to find off-market or private listings. Brevitas’ property search for distressed assets can help identify deals not broadly marketed. Additionally, auction platforms and special servicers often list foreclosed properties or notes for sale. (See our shoutout to the Real Insight Marketplace below.)

🔎 Explore Distressed Listings

Office-to-Residential Conversions

No property type has been more stressed in this cycle than the office sector. With remote and hybrid work reducing demand, office vacancy rates have soared (over 19% nationwide in late 2023) and rents have stagnated . Office valuations have plummeted – estimates predict a peak-to-trough decline around 40% for U.S. offices. However, out of this crisis emerges a creative solution: office conversions.

Investors and developers are increasingly looking to convert underutilized office buildings into other uses, primarily residential apartments or mixed-use projects. In fact, the pace of office-to-residential conversions is accelerating. According to CBRE, 2024 is on track to see the highest number of office conversions on record – with over 100 projects underway, a 63% jump from the previous year. Cities are encouraging this trend by rolling out incentives (tax abatements, zoning changes, fast-track permits) to help address housing shortages while reducing empty office space.

• Identify feasible candidates: Not every office can be easily converted. Look for buildings with floorplates, window layouts, and structural systems that can accommodate residential units. Mid-rise and older Class B/C offices often are better candidates than modern glass towers. Also consider parking availability and neighborhood amenities – factors important for residential use.
• Understand costs and regulations: Conversion projects can be expensive and complex. Evaluate the renovation cost per square foot and compare it to ground-up construction and the post-conversion value. Be mindful of building codes: adding residential units may require new plumbing, electrical, and life-safety systems. Local governments may offer grants or tax credits to offset some costs – do your homework on available programs.
• Leverage incentives: Many jurisdictions are actively encouraging conversions. For example, some cities offer density bonuses or waive certain fees for office-to-housing projects. Federal incentives are also being discussed – industry groups like NAIOP are urging Congress to enact tax credits and financing programs for conversions. Align your project to take advantage of these benefits.
• Market viability: Ensure there is demand for the new use. Converting an office to apartments makes sense in a city with low residential vacancy or high rents. Some offices are being converted to life science labs, hotels, or even self-storage. Study market conditions and pick a conversion strategy that fills a gap in that location.

Successful office conversions can turn a liability into a profitable asset, while also helping communities by creating housing or new commercial uses in dormant buildings. Brokers can add value by identifying which of their clients’ office listings might be pitched as conversion opportunities to developers.

🏢 Discover Office Conversion Opportunities

Note Sales and Debt Purchasing

Another avenue to navigate the debt cliff is through the purchase of notes (loans) rather than the real estate itself. When a borrower is in trouble, lenders sometimes prefer to sell the mortgage note to a third party, allowing the lender to recover some value immediately and pass along the workout process. For investors, buying a non-performing loan at a discount can be a way to eventually control the underlying property or to earn high returns if the loan is restructured successfully.

We are already seeing an uptick in loan sale activity. U.S. regional banks, under pressure from regulators and investors, have started to market more CRE loan portfolios to reduce risk. Even the FDIC got involved, seeking buyers for a $33 billion loan book from a failed bank. This means more notes on the market – ranging from individual defaulted mortgages to pools of loans. Brokers and investors should pay attention to these opportunities as they can often be sourced at a significant discount to the loan’s face value.

• Performing vs. non-performing: Note sales come in different flavors. A performing note (the borrower is still making payments) might be sold if a bank just wants to free up capital. Non-performing notes (borrower is delinquent or in default) sell at steeper discounts but come with the challenge of resolving the default. Know your risk appetite and workout expertise before diving in.
• Analyze the collateral: When buying debt, your ultimate security is the underlying property. Conduct a real estate analysis as if you were buying the property outright. If foreclosure becomes necessary, would you want to own that asset? What’s the realistic value of the collateral in the current market? For example, a note secured by a newly built apartment complex is very different from one secured by a half-empty 1980s office tower.
• Plan the workout strategy: Engage legal and asset management experts to handle the loan workout. Sometimes, you can negotiate a loan modification or extension with the borrower (perhaps giving them more time at a new rate, in exchange for some pay-down). Other times, foreclosure and taking ownership might be the goal. Have a clear strategy for turning the non-performing loan into a performing investment (or taking over the property).
• Find note listings: Sourcing note deals often means tapping specialized marketplaces and networks. The Real Marketplace Listings on Brevitas (powered by RealInsight) is one such channel, featuring auction opportunities for notes and REO assets. Additionally, brokers can use Brevitas to search for “note sale” listings or post buyer “wants” for certain loan types. Networking with loan brokers, bank workout departments, and servicing firms can also lead to off-market note deals.

Browse Sale Deals

Market Outlook and Policy Considerations

No one can predict exactly how the debt cliff will play out, but staying informed on macro trends is essential. Here are some key factors to watch:

• Interest rate trajectory: After a rapid series of rate hikes, the Federal Reserve has signaled that relief may be on the horizon. Fed Chair Jerome Powell indicated by late 2024 that “the time has come for policy to adjust” and that rate cuts could be imminent. Many forecasts expect gradual rate reductions through 2025 if inflation continues to cool. For CRE, lower interest rates would ease refinancing pressures and could stabilize cap rates. However, there’s a lag effect: even if the Fed cuts the benchmark rate, lenders may remain cautious and credit spreads could stay elevated in the near term. Investors should underwrite deals with some cushion, but be prepared for financing costs to improve over a 1-2 year horizon.
• Bond market and liquidity: Keep an eye on the bond market, especially the commercial mortgage-backed securities (CMBS) arena. Rising bond yields in 2023 made new CMBS issuances difficult. If Treasury yields retreat alongside Fed rate cuts, it might reopen the door for more refinancing via CMBS or other fixed-rate debt. Moreover, big institutional investors are stepping into the void left by banks – private equity debt funds and insurance companies are raising capital to fund or purchase CRE debt, which could provide alternative liquidity for troubled assets.
• Regulatory interventions: Regulators are actively monitoring the situation. Thus far, we’ve seen guidance encouraging banks to work with borrowers on loan modifications and extensions rather than rushing to foreclose. Regulators prefer an orderly workout to a fire-sale scenario that could destabilize markets. In 2023, banking agencies updated guidelines to allow more flexibility in restructuring CRE loans in a prudent manner. It’s reasonable to expect continued forbearance and creative solutions (like allowing banks to amortize losses over time) if it helps avoid a cascade of defaults. That said, not every loan can be saved – some high-profile defaults, especially on office towers in major cities, are making headlines and more will come.
• Government support and legislation: Aside from banking regulators, state and local governments are taking action. Several cities/states have introduced programs to incentivize the repurposing of distressed properties (particularly offices into housing, as discussed). The federal government has thus far not deployed any CRE-specific relief, but pressure is mounting. Proposals floated include tax credits for converting commercial properties to residential, or even an FDIC-led fund to assist smaller banks with excessive CRE exposure. While a 2008-style bailout is unlikely (since overall CRE distress, while significant, is more localized to certain sectors like office), government will play a role in fostering solutions – whether through policy tweaks or facilitating the transfer of troubled assets to new owners who can revitalize them.

Leveraging Marketplaces and Networks

In navigating the debt cliff, information and access are critical. Brokers and investors should leverage online marketplaces like Brevitas to stay on top of opportunities and connect with other professionals:

• Brevitas property search: Brevitas offers robust search tools to find listings that meet specific criteria. Use keyword searches (e.g., “distressed,” “motivated seller,” “redevelopment”) and filters (by asset type, location, price) to pinpoint potential deals. For instance, you can quickly pull up all listings mentioning "distressed" or find office properties flagged as conversion candidates. New listings are added daily, so consider saving searches and setting alerts to be notified of opportunities in real time.
• Real Marketplace on Brevitas: As mentioned, the RealInsight Marketplace partnership brings a curated selection of auction listings to Brevitas users. These often include bank-owned properties, non-performing notes, and other special situations from across the country. It’s a great resource to find assets that are at the tipping point of distress (or already in foreclosure) in a transparent bidding environment. Brokers can refer clients to these listings or even partner with investors to pursue them.
• Network and collaborate: Beyond clicking and browsing, use the platform to connect. Brevitas allows brokers and investors to contact listing brokers directly and even post “Wants” for properties or note investments they seek. By communicating your criteria (e.g., “Client looking for distressed multifamily in Texas, $5M-$15M range”), you invite off-market opportunities to come to you via the network. Likewise, respond to wants posted by others if you have or know of a match – this is a time for collaboration. The brokerage community can add tremendous value by matching distressed sellers with the right buyers quietly before those deals ever hit public auction.
• Stay educated: Continue reading market research and attending industry webinars about the evolving CRE landscape. Brevitas’ Bulletin and blog (as well as third-party sources) regularly publish insights on market trends, successful case studies (e.g., recent note sale transactions), and tips for deal-making in turbulent times. The better informed you are, the more confidently you can act when a window of opportunity opens.

Conclusion: Proactive Positioning for Success

The upcoming CRE debt cliff is a significant hurdle, but it doesn’t have to be a crisis for everyone. By understanding the scope of the challenge and employing creative strategies, investors and brokers can not only protect themselves but potentially thrive. The keys are to stay proactive and nimble:

Investors should shore up capital reserves, build relationships with lenders and special servicers, and identify target markets or asset types where they have expertise turning around troubled properties. Brokers should educate their clients about market realities and help them explore all options – whether that’s refinancing through alternative lenders, selling before a loan default, or finding JV equity to recapitalize an asset. In many cases, brokers can be the linchpin that brings a distressed deal together by connecting the right dots (buyer, seller, lender, investor).

Most importantly, don’t let fear paralyze you. Yes, the comparisons to 2008 are inevitable when we hear about trillions in maturing debt and bank losses. But unlike the sudden crash of the financial crisis, today’s situation is unfolding in slow motion and primarily impacting a few sectors. That gives savvy market participants a chance to anticipate and adapt. Whether it’s scooping up a well-located property at a fraction of replacement cost, repurposing an old office into the next hot apartment address, or buying debt at a deep discount, opportunities will abound for those prepared to seize them.

By leveraging data and listings on platforms like Brevitas, staying attuned to policy shifts, and thinking outside the box, investors and brokers can successfully navigate the CRE debt cliff – and come out on the other side stronger and more prosperous.

References

• S&P Global Market Intelligence – Commercial real estate maturity wall: $950B in 2024, peaks in 2027 (Analysis of nationwide property records on upcoming CRE loan maturities)
• Business Insider – Financial Disaster Risks Loom Over US Commercial Real Estate Sector (Dec 2023). Insight into rising defaults and estimate that ~14% of CRE properties are in negative equity.
• Reuters – Fed's Powell, in policy shift, says 'time has come' to cut rates (Aug 2024). Federal Reserve signals an imminent start to interest rate cuts amid cooling inflation.
• CBRE via Facilities Dive – Office conversion projects up 63% in 2024. Highlights record-high office-to-residential conversion activity and growing incentives from cities for adaptive reuse.
• NAIOP Development Magazine – Federal Incentives Could Help Spur Property Conversions (Spring 2023). Advocacy for federal policy to support converting struggling office properties to other uses.
• Reuters – US regional banks seen booking more CRE losses, loan sales (April 2024). Reports that regional banks are increasing reserves and looking to sell more property loans as CRE market pressures mount.
• RSM US – Commercial Real Estate Maturities: True Exposure for Financial Institutions (2024). Analysis noting banks are actively working to modify or extend loans to mitigate default risks as the maturity wall approaches.