Blackstone Mortgage Trust and KKR Real Estate Finance Trust, two of the largest mortgage-focused real estate investment trusts, originated no new loans during the first half of this year, The Wall Street Journal reported.

Starwood Property Trust, another key private source of mortgages for the commercial sector, also has slashed its pace of lending over the past several quarters, the WSJ noted.

Mortgage real estate trusts (MREITS) usually create about $10 billion each quarter, analyst Jade Rahmani at investment banker Keefe, Bruyette & Woods, told the WSJ, but now “hardly anyone has made new loans.”

The problem: far fewer investors are in the market for new properties, after the shift to remote work has slashed demand for office space and on-line shopping has emptied physical storefronts.

Investors bought just $83.6 billion in commercial real estate during this year’s second quarter, a 63-percent drop from the same period a year ago, MSCI Real Assets said.

Borrowers with lower-interest loans are holding onto them as long as possible. 

“If you’re a borrower, you’re exercising every option you have to extend existing loans,” Matthew Anderson, data firm Trepp’s managing director, told the WSJ.

Also, the lenders have become far more cautious.

The trusts could face demands from their lending banks for more cash as added security if the quality of the loans MREITS have made deteriorates beyond a certain point.

MREITS also are obligated to pay most of their taxable income as dividends to investors. As a result, many of the trusts have begun to hoard cash against a slumping commercial real estate market.

Total lending this year for commercial and multifamily properties will dive to $504 billion, 38 percent below 2022’s figure, analysts have predicted.  

Commercial banks already have pulled back from the sector. The collapse of three U.S. banks this spring added to banks’ woes after low-interest bonds they bought during the COVID War lost value as the U.S. Federal Reserve steadily ratcheted up its interest rates.

Lenders’ retreat comes at a time when commercial real estate vacancy rates are rising, especially among office buildings. Higher interest rates make it harder to service or refinance existing loans, while inflation has boosted operating costs and squeezed landlords’ margins.

TREND FORECAST: Defaults are increasing, even among major property owners, as we reported in “Top Private Equity Firm Defaults on Two Office Tower Loans” (21 Feb 2023) and in “Office Tower Owner Defaults on $1.7 Billion in Mortgages” (28 Feb 2023).

With non-bank sources of loans drying up, the commercial real estate sector’s nosedive will accelerate, increasing the dangers for banks, city tax collections, equity markets, and all other industries linked to the industry.