The Rate Cut Won’t Save These Real-Estate Owners

By the end of 2023, the co-working company had left the building. The interest rate for the loan backing the property shot up to more than 10%. Moceri, who didn’t respond to requests for comment, lost the property to lenders in July.

Many owners of apartment buildings, hotels and other real estate took advantage of rock-bottom rates a few years ago, loading up on debt when borrowing was cheap. After rates soared starting in early 2022, they missed payments and had to hope their creditors would extend deadlines. 

Now, the Federal Reserve has come to the rescue for some borrowers. It cut short-term rates by a half-percentage point last week and is widely expected to follow with more. Commercial mortgage rates have been falling for weeks in anticipation of a Fed move. 

The rate cut is welcome news to a commercial-property market that has struggled with sinking valuations, stalled sales and difficulties refinancing. More than $2.2 trillion in commercial-property debt is coming due between this year and 2027, according to data firm Trepp.  

Interest-rate projections show central-bank officials penciled in the equivalent of another four cuts of a quarter point next year. Many analysts expect that most lenders and owners will be able to hold on until rates come down enough to refinance.

“This will help a lot,” said Tom Shapiro, president of developer and investor GTIS Partners. “It makes people feel better about a soft landing.”

But the Fed’s deliverance won’t be enough for some of America’s most highly leveraged property owners. Lenders that have been willing to extend their loans have run out of patience. 

Securitized commercial property loans in August

Fixed-interest

Nondistressed:

$711.7 billion

Distressed:

$39.7 billion

Floating-interest

Nondistressed:

$296.7 billion

Distressed:

$27 billion

Fixed-interest

Nondistressed:

$711.7 billion

Distressed:

$39.7 billion

Floating-interest

Nondistressed:

$296.7 billion

Distressed:

$27 billion

Fixed-interest

Distressed:

$39.7 billion

Nondistressed:

$711.7 billion

Floating-interest

Distressed:

$27 billion

Nondistressed:

$296.7 billion

Note: Distressed loans are those where payments are late by at least 30 days or loans that have been transferred to special servicers.
Source: CRED-iQ

Banks, partly under pressure from regulators, are clearing more bad loans off their books through lender-induced selloffs, said Chad Lavender, an executive at the Newmark commercial-real-estate company. And other lenders think they might be better off taking control of a property rather than continuing to let borrowers miss payments.

“As rates come in and values improve, the incentives to wait diminish,” said Richard Mack, chief executive of Mack Real Estate Credit Strategies, a commercial-property lender. 

The value of commercial real-estate loans in foreclosure nearly tripled between January and August this year to reach $19.2 billion, according to an analysis of securitized property loans by CRED-iQ.

Other measures of debt distress also rose during the period. Landlords who took out floating-rate loans, which shot up with prior interest-rate increases, are “getting clobbered most,” said Mike Haas, CEO of CRED-iQ.

Multifamily owner losing properties

 Tides Equities, a privately held company based in Los Angeles, is one of the biggest apartment landlords in the Southwest. The company emblazoned its name on more than 100 properties, an unusual move for apartment owners, which tend to operate behind the scenes rather than flash their brand. Along roadways leading out of cities such as Phoenix and Dallas, the Tides signs became a sight as common as Arby’s or Pizza Hut. 

Some of those signs are about to come down. Around a dozen Tides buildings have entered foreclosure or a similar process this year. A handful already have been turned over to lenders. Analysts have flagged other Tides buildings for income that is too low to cover debts.

Like many new entrants to Sunbelt real estate during the past decade, Tides bought dozens of low-rent buildings with floating-rate debt. In pitches to investors, the company said it could make renovations, then increase rents, sometimes by hundreds of dollars a unit.

Then interest rates skyrocketed. More recently, rent growth declined in some of the cities where Tides invested. Tides told its investors last year that its tenants were struggling to pay the company’s higher rents.

Tides didn’t respond to requests for comment for this article. In an interview with The Wall Street Journal in 2023, Tides Equities co-founder Sean Kia said, “The math equation has really just changed for a lot of investors and a lot of landlords.”

At one now-foreclosed property in Austin, Texas, Tides in early 2022 took out nearly 91% of the apartment complex’s value in a floating-rate loan, putting the company at high risk for default, Morningstar said in a report that year. The ratings company also noted that Tides “relies heavily on continued rent appreciation” and that market weakness would increase the risk of failure.

An affiliate of lender Rialto Capital Advisors took back the property from Tides this month.

The layered troubles across Tides’ many buildings have made it difficult for the company to land rescue money, even as rates start to come down. 

Hotels worth less than their debt

Hotel owner Ashford Hospitality Trust viewed floating-rate debt as a safe option. When economic times were bad and hotel room rates fell, interest rates would also likely decline, the company reasoned.

The last few years proved to be an exception. When the pandemic pummeled the hotel business, rates initially went down. But in 2022, before the hotel business had fully recovered, rates were rising again. By the summer of the following year, Ashford’s interest rate on a portfolio of 14 hotels scattered across the country had about doubled to reach nearly 9%. The value of the hotels had shrunk to less than the total debt.

Lower rates alone wouldn’t have been enough to save the hotels, said Stephen Zsigray, Ashford’s chief executive. The company had to choose between defaulting or making payments on properties already underwater—“essentially ‘throwing good money after bad,’” he said.

Other commercial owners remain hopeful that the Fed’s rate cut can keep them holding on just a bit longer. Property lenders are anticipating where rates might be months from now to make decisions. Once the dust settles, lenders might also be more forgiving of landlords than in years past, said Michael Lavipour, an executive at lender Affinius Capital.

“No one could have predicted the pandemic and the sort of fallouts associated with it,” Lavipour said. “Lenders don’t think it’s the [borrower’s] fault.”

Write to Will Parker at will.parker@wsj.com