Market updates and sector developments

AEW has published its first global commercial real estate debt funding gap (DFG) analysis, which provides insights on the relative refinancing challenges faced by three key regions. The findings indicate that Europe has the largest DFG on a relative basis, standing at 16% of loan originations, closely followed by the US at 14%, with Asia Pacific remaining relatively immune. Meanwhile, office loans consistently emerge as the primary concern across all three regions, followed by the multifamily and retail property sectors, which experienced significant capital value declines during the recent economic cycle.

In Europe, Germany and the Nordics exhibit the highest DFGs at over 22% and 18% respectively, while the UK and Southern Europe are best placed at 9% and 11% respectively. Notably, the DFG for Europe is projected to return to 2024 levels in 2026 after a substantial decline in 2025, attributed to the rebound in 2021 acquisitions and AEW’s assumption of uniform five-year loan maturities.

In the US, despite similar value declines as in Europe, detailed loan maturity data for 2024-2026 points to a declining DFG in 2025 and 2026, compared to 2024. Sector-wise, offices and retail in the US show relative DFGs of 37% and 29%, presenting significant variations from the 14% US average. Conversely, loans backed by industrial collateral exhibit a lower relative DFG.

There is a more diverse landscape in the APAC region, with major markets - such as Australia, Singapore, South Korea and Japan, as well as Tier 1 cities in China - all facing a DFG of 7.6%, lower than that of both the US and Europe. Notably, around 60% of APAC's DFG is concentrated in the office markets of Australia and Tier 1 cities in China, with an additional 30% in the retail sector. The shorter three-year loan tenures in APAC and the slow adjustment of property valuations/pricing contribute to the region's comparatively low relative DFG, according to AEW.

“With many commentators believing interest rates have peaked and some early confidence returning to the market, 2024 will be a critical year for real estate globally. In the end, the scale of the DFG challenge and its impact on local markets ultimately depends on investors and lenders’ ability to cure associated defaults and absorb potential losses,” comments Hans Vrensen, head of research and strategy at AEW.

The study utilised a standardised methodology, incorporating the best available local data on CRE loan maturities, originations and refinancing assumptions.