Finding effective debt management solutions in a challenging global market

Commercial real estate (CRE) owners, investment managers and developers have enjoyed a long run of abundant low-cost capital. But now, they are facing a stark new reality: debt financing that is more expensive and difficult to source. They are also having to deal with the pressures of higher capital costs and tighter liquidity in managing existing portfolios and sourcing capital for acquisition and development strategies.

A significant challenge for CRE firms is maintaining portfolio performance in a higher interest rate environment while managing exposure to other market risks. Ensuring that portfolios meet the targets set for investors has become a huge challenge, particularly as the cost of carry eats into overall portfolio performance.

To mitigate the risks associated with higher interest rates, firms are exploring various strategies to enhance performance. By analysing market scenarios and sensitivity at different levels of the portfolio, financing teams are getting a better understanding of how interest rate fluctuations and other market risks affect their investments. This data-driven approach allows them to make more informed decisions, adjust their debt management strategies proactively and optimise financing.

Floating rate debt

One area of analysis, for example, is within the mix of fixed and floating rate debt held. CRE firms that have a high proportion of their portfolio financed by floating rate debt have taken a bigger hit from rising rates, especially if they did not have interest rate caps in place or their rate caps expired.

Firms are now keeping a closer eye on the balance between fixed-rate and floating-rate debt in their investment portfolios to lessen the impact of increasing interest rates. By strategically managing the mix of fixed and floating rate debt, they can mitigate their vulnerability to interest rate fluctuations. This approach is crucial in safeguarding the portfolio’s performance and financial stability during dynamic market conditions.

Refinancing maturing debt

The ability to refinance maturing debt is a growing concern. According to research, a staggering $1.5trn of US commercial and multifamily debt matures before the end of 2025. In Europe, approximately 81% of all outstanding debt will come due during the next five years. During uncertain economic forecasts on a macro level, it becomes even more challenging to find lenders and secure refinancing options. For the CRE firm, an additional hurdle is that some of its secured debt is backed by properties that haven’t fully recovered from the pandemic.

To tackle these challenges, some firms are calculating benchmark rates for their debt portfolio. This helps them figure out the ideal approach for refinancing their debt as it reaches maturity. By comparing their rates to relevant indicators and market trends, they can assess their funding options more efficiently and make informed choices about the most appropriate financing structures. This ultimately enables them to better navigate the punishing debt management landscape.

Debt management solutions

Debt management in broad terms is the act of combining technology, expertise and analytics to accurately and efficiently review debt portfolios, manage overall costs and risks, and identify opportunities for refinancing.

It is a major challenge in the CRE industry.  Internally, finance departments are tasked with collecting, organising and consolidating large amounts of data, often using disconnected systems. This often leads to more time reconciling data discrepancies instead of uncovering performance improvements. Management of financial risk requires complex modelling, forecasting and reforecasting of real time data, which can be laborious if using Excel or similar programs.

Even at the best of times, these are operational challenges, but in an environment where every basis point can move the needle on returns, it becomes ever more vital that the systems and the data align for better decision making.

A better way

Today’s markets require a more active approach to debt management, an approach to help firms better anticipate market exposure, optimise performance and reduce overall risk.  Taking these crucial steps to more efficiently assess and adapt through fluctuating markets is helping CRE loan borrowers to survive and thrive in these dynamic and ever-changing market conditions.