As Debt Comes Due, Investment Opportunities Abound

With nearly $1.5 trillion of U.S. commercial real estate debt due for repayment before the end of 2025, many property owners are wondering who’s going to lend to them.

Many owners are still paying interest rates that are lower than current levels and will soon need to refinance their loans, according to a recent report from JP Morgan.

“They will be debt constrained when it’s time to refinance,” said Victor Whitmore, founder and CEO of Precision Equity, a $170 million real estate investment firm. “When a loan is due, you either sell the property or refinance the debt.”

A growing number of investors, bankers and economists are warning that the sector is headed for a significant downturn because of rising interest rates, lower property values and higher vacancy rates.

“Interest rates have a huge impact on the entire industry,” Whitmore said. “The federal funds rate was a zero not that long ago, and today, it’s over 5%. That’s a big problem for commercial real estate investors.”

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Still, real estate transactions don’t stop when interest rates go up because real estate is a key investment and its value will continue to rise; Whitmore views the downturn as a unique investor opportunity.

Compounding matters is the fact that remote and hybrid work has largely reduced demand for office space, which is particularly problematic for Class B and Class C buildings — especially those with shorter leases located outside of prime locations.

While this spells trouble for the commercial real estate sector, Whitmore sees unique opportunities. Class A properties, for example, are performing well, suggesting that there is still demand for high-quality space. Office properties with leases of 10 years or more may be able to ride out the market correction.

While the office sector struggles, many investors are turning their attention to multifamily for the first time. They’re taking over properties that previous owners paid high prices for but got low cap rates. Geographically, Whitmore said that the Midwest is a solid investment opportunity because of its slow and steady appreciation and rising rental rates.

“There’s going to be a lot of opportunities for experienced investors to take advantage of some of these loans,” Whitmore said. “There will be a lot of deals that are going back to the bank. 

“Overall, for somebody wanting to get started in real estate, there’s never a bad time. It’s not as easy to get debt but it doesn’t change the way you look at a property. Multifamily is strong because of inflation and rental rates going up.”

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