An impending wave of maturities is on the horizon as the Mortgage Bankers Association estimates $2.6 trillion of loan maturities through 2027.
Research from Colliers Capital Markets finds the asset classes facing the most significant maturity wall are hospitality and office: “Between 2023 and 2024, 54% of hospitality loans are expected to mature, while 40.9% of office loans will.”
The looming debt situation has the potential to greatly impact the healthcare sector, as well. The combination of rising interest rates and tighter credit underwriting standards is making it increasingly difficult for some borrowers to stay afloat and they are now exploring options for managing their debt.
Options for Borrowers
If confronted with mounting debt, borrowers have options. Each has its own unique set of benefits and drawbacks, and the optimal course of action depends on the borrower’s overall financial circumstances and long-term goals.
One route that borrowers may consider is refinancing their debt. While this can lower monthly payments or reduce the overall debt burden, refinancing may also come with some downsides. For example, the borrower may need to infuse the project with additional equity capital in order to meet tighter underwriting standards and higher rates. Additionally, they may need to pay additional fees and closing costs associated with the new loan.
“An impending wave of maturities is on the horizon as the MBA estimates $2.6 trillion of loan maturities through 2027. Colliers research finds the asset classes facing the most significant maturity wall are hospitality and office.”
Another option borrowers may consider is selling the building. If the borrower owns a healthcare facility or other real estate, they may be able to sell the property to raise funds to pay off their debt. This can be a particularly effective strategy if the property has appreciated in value since it was purchased. The risks are achieving a desirable sale price and the possibility of needing to find a new location for their business, which can be disruptive and expensive.
A third possibility is giving the keys back to the lender. This option is often the course of last resort for borrowers who are unable to make the payments and do not have other viable options. It can also have potential serious consequences for the borrower’s credit score and financial future.
Refinancing, selling the building, or giving the keys back to the lender are just a few of the strategies that borrowers may consider. Ultimately, the key to success will be careful planning, strategic thinking, and a willingness to adapt to changing circumstances.
Opportunity for Investors & Lenders
The financial sector is facing significant disruption, and the economic climate is creating new demand among lenders. With a banking crisis currently unfolding, such as the collapse of SVB , Signature Bank and First Republic Bank, investment firms that lend to healthcare companies are seeing increased interest from entrepreneurs, reports The Wall Street Journal. These investors may be able to provide larger loans with more flexible terms than those typically provided by banks.
Although the current debt forecast is uncertain, there are plenty of resources and reasons for optimism in the medical office sector. Aaron Jodka of Colliers Capital Markets explains, “Debt is still available, despite the recent volatility in the banking sector. The middle markets are still active, particularly for banks who have longstanding relationships with borrowers.”
Additionally, medical offices are considered to be well-performing assets amid economic downturns and are more apt to weather volatility. Per GlobeSt.com, the average lease term in medical offices is 19 years, compared to an average lease term of 4.3 years for general office leases in the U.S.