How to Secure Commercial Real Estate Debt When Banks Say No: A 2024 Survival Guide
Commercial real estate faces an unprecedented challenge as $950 billion in debt will mature in 2024. This massive amount creates immense pressure on property owners and investors across the market.
Recent data reveals concerning trends. CRE loan interest rates have surged from 4.3% to 6.2%. Delinquency rates show a troubling increase from 0.77% to 1.18% within a year. Major U.S. cities struggle with vacancy rates as 20% of office space remained unleased through late 2023.
The situation has become more complex as traditional banks reduce their lending activities. Property owners now desperately search for refinancing alternatives. The Federal Reserve's aggressive rate hikes from near-zero to beyond 5% within 17 months have pushed the commercial real estate market to a breaking point.
Securing alternative financing options becomes significant as traditional banks become restrictive. This piece outlines practical strategies to obtain funding, especially valuable to those who face upcoming loan maturities or seek property acquisition opportunities in today's challenging market.
Understanding the Commercial Real Estate Crisis in 2024
The commercial real estate sector faces a huge financing challenge that will last beyond 2024. The numbers tell us just how big this crisis could be.
The $950 billion maturity wall explained
Property owners in the commercial sector are up against what experts call a "maturity wall" - a time when many loans come due at once. S&P Global Market Intelligence reports that $950 billion in commercial real estate mortgages will come due in 2024 [1]. This financial hurdle doesn't stop there. The maturity wall grows to almost $1 trillion in 2025 and reaches its peak at $1.26 trillion in 2027 [1].
Commercial real estate loans work differently from home mortgages. While homeowners get 30-year terms, commercial loans usually run for 10 years or less and need complete refinancing when they end [2]. This creates a tough situation for owners who got their loans during record-low interest rates. Many loans that should have ended earlier were stretched through what insiders call "extend and pretend" strategies. These delays pushed more refinancing into this year, leading to a 41% jump in loans due by the end of 2024 compared to last year [2].
Why traditional banks are saying no
Big banks and traditional lenders have cut back on commercial real estate lending a lot. Here's why:
- Post-pandemic occupancy shifts: Office buildings sat empty at a rate of 17.9% nationwide in 2023. Tech hubs like San Francisco saw even higher rates at 24% [2]. Some properties now sell for just 20% of what they asked before the pandemic [3].
- Regulatory pressure: Bank regulators watch CRE lending closely after regional banks like First Republic and Signature Bank failed. Both were big commercial real estate lenders [4] [4].
- Concentrated exposure: Small and regional banks hold nearly two-thirds of all commercial real estate loans. This makes them vulnerable when the market turns down [4]. Small banks carry 4.4 times more U.S. CRE loans than bigger banks. These loans make up 28.7% of small bank assets but only 6.5% at large banks [5].
What rising interest rates mean for refinancing
The Federal Reserve's rate hikes since March 2022 changed everything about refinancing. Commercial real estate loans now average 6.2% interest, up from 4.3% on maturing loans - that's almost 200 basis points higher [1]. This big rate jump makes refinancing much harder.
Owners must now find more equity capital or risk defaulting. One analyst's example shows how tough it is: if a property's value drops while rates rise, a borrower might need $18 million more in equity just to keep the same loan-to-value ratio for refinancing [5].
Property owners now look for temporary fixes instead of permanent solutions. More people ask for bridge-to-bridge refinancing. They need extra time to finish projects while current lenders try to get their money back [6]. Lenders often extend terms because it costs less than foreclosure [6].
This mix of maturing loans, cautious banks, and higher rates creates what analysts describe as a "slowly unfolding issue." The commercial real estate market will likely feel this pressure until at least 2027 [1] [4].
Exploring Private Debt Funds as an Alternative
Private debt funds have become a vital alternative source of capital as traditional banks step back from commercial real estate financing. These investment vehicles now fill an essential financing gap, a role that became prominent after the 2008 financial crisis.
How CRE debt funds operate
Private commercial real estate debt funds gather investor capital to provide direct loans to property developers and owners. These funds emerged from the aftermath of the 2008 financial crisis. They stepped in while banks struggled with regulatory constraints [7]. The market impact of these funds has grown substantially. Institutional private debt funds have secured $85.2 billion in global commitments, with $49.6 billion coming from North America [7].
Each fund specializes in specific loan strategies or investment approaches. Some target residential construction loans for multifamily apartments. Others prefer retail developments or industrial spaces [7]. The funds earn money through interest payments that start at 9% or higher and adjust based on market conditions [7]. They also collect various borrower fees including:
- Origination fees (typically 1-3% collected at loan initiation)
- Exit fees (paid when loans are repaid)
- Early termination and extension fees [7]
Debt funds issue loans backed by real estate collateral, unlike equity investments that depend on property ownership [8]. Loan terms range from short-term bridge financing of 90 days to longer options based on project needs [8].
Advantages over traditional bank financing
These debt funds offer clear benefits compared to conventional bank financing in today's market:
Speed and flexibility: Borrowers can get capital faster through debt funds than banks. This speed helps them seize opportunities quickly [7]. The funds create custom financing solutions for specific project needs, unlike banks with strict approval processes [9].
Filling market gaps: Many areas that banks left after 2008 never saw them return [7]. Debt funds now provide capital between $5-150 million - too much for small lenders but not enough for non-bank institutional lenders [7].
Creative solutions: The funds offer higher loan-to-value ratios, longer terms, and innovative structures compared to traditional banks [9]. This flexibility helps property owners refinance despite challenging valuations.
Steady income for investors: These funds deliver what's called "mailbox money" - reliable, high-yield income distributed monthly, often reaching 8% annually [7].
Top commercial real estate debt funds to approach
The debt fund landscape keeps growing despite market challenges. Blackstone's recent $8 billion commercial real estate debt fund matches the record for similar investments, showing strong institutional confidence [10].
The top 50 debt funds raised $244.3 billion in 2022, growing 20% from 2021 [1]. Preqin data shows CRE debt funds managing $77.4 billion [1].
Institutional investors see these funds as attractive alternatives. A survey found 86% of investors were happy with their private debt fund returns [7]. Major institutions like pension funds, insurance companies, and endowments appreciate the steady income. They also value the lower risk compared to equity investments [8].
Borrowers looking beyond traditional financing should approach debt funds that specialize in their property type. This strategy offers the best chance to secure good terms in this challenging refinancing environment.
Leveraging Mezzanine Financing and Preferred Equity
The commercial real estate world faces tighter restrictions today, and property owners need gap financing to deal with the maturity wall. Senior lenders now limit their loans to conservative loan-to-value ratios. Mezzanine financing and preferred equity have emerged as great alternatives to bridge these funding gaps.
Structuring mezzanine loans for gap financing
Mezzanine financing works as a hybrid of debt and equity that bridges the gap between senior debt and common equity in the capital stack. To cite an instance, see a $20 million deal with a 70% loan-to-value limit. A senior lender might provide only $14 million, leaving a $6 million funding gap [11]. Mezzanine loans can fill this void without diluting equity ownership and potentially boost the overall return on equity [11].
This type of financing usually takes the form of unsecured subordinated debt below senior loans but above equity positions [12]. The mezzanine lender protects their position through a pledge of 100% equity ownership interests in the property-owning entity [13]. This structure lets developers:
- Boost leverage without extra physical collateral [14]
- Complete projects faster by filling funding gaps quickly [14]
- Balance leverage ratios through combined equity and liability structures [14]
Using preferred equity to avoid loan-to-value constraints
Preferred equity has become popular as another option when traditional lenders play it safe. It sits behind senior debt but ahead of common equity in the capital stack [4], and preferred equity comes with its own benefits:
Preferred equity stays available behind agency financing where subordinate secured financing faces limits [2]. Banks often treat preferred equity as real equity within the capital stack, while most lenders won't think of mezzanine financing as equity [15]. This difference matters because lenders usually want at least 15% of capital in transactions to be equity [15].
Unlike mezzanine loans, preferred equity takes a proportional ownership stake in the LLC that owns the property [15]. This setup creates a balance between risk and reward that fits between senior debt and common equity [4].
Cost considerations and typical terms
Both financing options come with premium costs that reflect their higher risk profiles:
Mezzanine loans charge interest rates of 12-20% yearly [12], sometimes hitting 30% in riskier scenarios [16]. These loans feature interest-only payments without principal amortization [17] and terms that match the senior debt (5-7 years) [18].
Preferred equity costs more than mezzanine debt because it sits lower in the capital stack and needs returns of 12-16% [19]. This pricier option gives more flexibility [3] but developers must show strong project fundamentals and clear repayment plans [20].
These financing methods help navigate today's tough commercial real estate debt environment. Each option brings unique advantages based on project needs and existing capital structure.
Tapping into CMBS and Life Insurance Companies
Banks are becoming more selective with their financing, and sophisticated investors now look to commercial mortgage-backed securities (CMBS) and life insurance companies as solid options for commercial real estate debt.
CMBS loans make sense despite the commercial real estate bubble
CMBS loans have bounced back impressively in 2024 even with market headwinds. U.S. private-label CMBS issuance has hit $32.2 billion so far in 2024, compared to $13 billion in the same timeframe last year [6]. The market has seen almost triple the amount of new CMBS securities purchased compared to the first five months of 2023 [6].
These loans work best in specific situations:
Scale matters: CMBS loans can grow as large as bond investor appetite allows, unlike banks with their portfolio restrictions [21]
Bank relationships aren't working: CMBS loans help free up capacity for relationship lending as traditional banks step back [21]
You need more leverage: Most property types can get up to 75% LTV with CMBS loans [22]
Fixed-rate terms work better: CMBS loans usually come with fixed interest rates that shield borrowers from rate hikes [23]
These benefits come with some drawbacks. CMBS loans carry higher prepayment premiums than bank loans and often require yield maintenance or defeasance [23]. On top of that, loan changes can get complicated since multiple investors own pieces of your debt [6].
Life insurance companies offer excellent long-term financing options
Life insurance companies control 15.7% of outstanding commercial mortgages, which adds up to $753 billion [24]. This makes them the third-largest player in the CRE lending market [25]. Their capital costs run lower than banks because they fund loans through their general account using policyholder premiums [24].
Life company financing stands out because:
Better safety record: Their default rates sit at just 0.43%, beating banks at 1.15% and CMBS at 4.82% [25]
Better rates: Most use the 10-year Treasury plus 2.0-2.5%, which often beats what banks offer [24]
Longer terms: They can go from 7 to 20 years, and some even offer 25-year fully amortizing options [26]
Life companies keep growing their real estate allocations each year [24]. Their commercial loan volume jumped 60% between Q1 and Q2 of 2024 [24]. This creates a perfect opportunity to bring them strong projects.
Negotiating with Regional and Community Banks
Regional and community banks offer overlooked financing options in this challenging market as large financial institutions step back from commercial real estate lending.
Why smaller banks might still say yes when large ones say no
Small banks operate with different risk profiles than their larger counterparts. These smaller institutions control nearly two-thirds of all commercial real estate loans, which gives them expert knowledge of local markets [27]. Their reserve levels stay steady and match their lower-risk portfolios [5].
Small banks target different property types than major banks. Regional lenders stay away from high-risk assets like CBD office loans that cause problems for larger institutions [5]. This key difference shows in their performance—small banks report lower charge-off rates and few loan modifications [5].
Building relationships with local lenders
Local banking thrives on building relationships instead of processing transactions. Regional banks value personal connections more than larger institutions and deliver responsive, customized service [28].
Here's how to develop these relationships:
- Talk openly about your business situation because lenders hate surprises [29]
- Build mutually beneficial alliances by bringing more business through deposits and cash management [29]
- Tell your business story and values beyond the numbers [30]
- Stay in touch even without active financing needs [30]
Regional banks love working with borrowers who see them as partners rather than just money sources [30]. Your referrals to other businesses strengthen these connections [29].
Preparing a compelling loan package
A winning loan application needs complete preparation. Your package must include:
- Business and personal financial statements from the past three years [7]
- A detailed business plan that explains loan purpose and repayment strategy [7]
- Property documentation with existing appraisals, surveys, and title policies [7]
- A debt schedule listing all existing obligations [7]
Be ready to answer direct questions about your loan purpose, repayment plans, and your business's value as a banking client [9]. Your business's local effect matters because community banks care deeply about their regions' economic health.
Conclusion
Commercial real estate financing faces unprecedented challenges in 2024 and beyond. Property owners must adapt quickly as traditional banks pull back from the market. Several viable alternatives exist for those ready to explore new financing paths.
Success demands a multi-pronged approach from smart property owners. Private debt funds deliver speed and flexibility, while mezzanine financing and preferred equity help bridge funding gaps. Life insurance companies and CMBS are stable long-term options, particularly for larger properties. Regional and community banks continue to be reliable partners for well-prepared borrowers who maintain strong local connections.
Property owners shouldn't wait for market conditions to improve - they need to act now. Building relationships with alternative lenders requires time but becomes crucial when urgent refinancing needs arise. Those who grasp their options and prepare well will direct their way through this challenging period.
Note that opportunities to secure commercial real estate debt still exist, despite scarce traditional bank financing. Property owners who focus on careful planning, relationship building, and remain open to alternative funding sources will overcome current market challenges and set themselves up for long-term success.
FAQs
Q1. What alternative financing options are available when banks reject commercial real estate loans? Several alternatives exist, including private debt funds, mezzanine financing, preferred equity, CMBS loans, and life insurance companies. Each option has unique advantages and can be suitable depending on your specific situation and property type.
Q2. How can property owners prepare for the upcoming commercial real estate debt maturity wall? Property owners should act proactively by exploring alternative financing sources, building relationships with potential lenders, and preparing comprehensive loan packages. It's crucial to understand your options and start the refinancing process well in advance of loan maturity.
Q3. What are the advantages of working with regional and community banks for commercial real estate financing? Regional and community banks often have deeper expertise in local markets, may be more willing to lend on certain property types, and value personal relationships. They can offer more tailored services and may say yes when larger banks say no, especially for well-prepared borrowers with strong local connections.
Q4. How do mezzanine financing and preferred equity help in commercial real estate deals? Mezzanine financing and preferred equity can bridge funding gaps when senior lenders cap their loans at conservative loan-to-value ratios. They allow property owners to increase leverage without additional physical collateral and can help balance leverage ratios through combined equity and liability structures.
Q5. What factors are contributing to the current commercial real estate financing crisis? The crisis is driven by a combination of factors, including a $950 billion maturity wall in 2024, rising interest rates, post-pandemic occupancy shifts (especially in office spaces), regulatory pressure on banks, and concentrated exposure of regional banks to commercial real estate loans. These factors have led to tightened lending criteria and a pullback from traditional lenders.
References
[1] - https://www.altusgroup.com/insights/the-rise-of-commercial-real-estate-debt-funds/
[2] - https://katten.com/debt-like-preferred-equity-in-real-estate-financing
[3] - https://www.lev.co/blog/preferred-equity-vs-mezzanine-debt
[4] - https://www.crowdstreet.com/resources/investment-fundamentals/preferred-equity-101
[5] - https://bankingjournal.aba.com/2024/12/community-banks-cecl-and-cre/
[6] - https://commercialobserver.com/2024/06/cmbs-financing-commercial-real-estate-2024/
[7] - https://www.crews.bank/commercial-loans/tips-for-securing-a-commercial-real-estate-loan
[8] - https://agorareal.com/blog/commercial-real-estate-debt-funds/
[9] - https://www.security-banks.com/blog/commercial-loan-application-checklist-for-small-business-owners
[10] - https://www.wsj.com/real-estate/commercial/blackstone-raises-largest-commercial-property-debt-fund-with-8-billion-haul-3c3abe0f
[11] - https://highpeakscapital.com/commercial-real-esate-mezzanine-loans/
[12] - https://www.investopedia.com/terms/m/mezzaninefinancing.asp
[13] - https://www.dechert.com/content/dam/dechert files/knowledge/publication/2013/12/commercial-real-estate-mezzanine-lending-current-structural-fea/Commercial Real Estate Mezzanine Lending - Current Structural Features, Loan Document.pdf
[14] - https://avanacapital.com/owner-occupied-real-estate/mezzanine-financing-commercial-real-estate/
[15] - https://gowercrowd.com/real-estate-syndication/preferred-equity-mezzanine-debt
[16] - https://getbuilt.com/blog/what-is-mezzanine-financing-in-commercial-real-estate/
[17] - https://www.commercialrealestate.loans/mezzanine-financing/
[18] - https://www.multifamily.loans/multifamily-and-apartment-mezzanine-financing/
[19] - https://dxd.capital/education/navigating-the-risks-of-preferred-equity-in-commercial-real-estate
[20] - https://www.northspyre.com/blog/mezzanine-financing-real-estate
[21] - https://www.jpmorgan.com/insights/real-estate/commercial-real-estate/commercial-mortgage-backed-securities-cmbs-loans
[22] - https://cmbs.loans/blog/cmbs-loans-pros-and-cons/
[23] - https://www.investopedia.com/terms/c/cmbs.asp
[24] - https://www.gantryinc.com/post/life-cos-drive-more-lending-while-banks-take-a-backseat
[25] - https://content.naic.org/sites/default/files/capital-markets-special-reports-cre-mortgage-loans-ye2023.pdf
[26] - https://cmbs.loans/blog/cmbs-loans-vs-life-company-loans/
[27] - https://www.newyorklifeinvestments.com/mackay-shields/insights/banks-and-commercial-real-estate
[28] - https://www.commercialrealestate.loans/blog/role-of-regional-banks-in-cre-financing/
[29] - https://www.kmco.com/insights/four-tips-for-maintaining-a-good-relationship-with-your-lender/
[30] - https://www.bankofutah.com/insights/the-heart-of-commercial-lending-5-shared-responsibilities-for-building-strong-business-partnerships