Landlords for offices, apartment complexes and other commercial real estate have $1.5 trillion of debt due by the end of next year, and about a quarter of that borrowing could be hard to refinance, according to Jones Lang LaSalle Inc.

The value of buildings has broadly dropped after higher interest rates boosted funding costs for property owners. Those lower valuations make it harder for landlords to borrow as much, forcing many property owners to raise equity capital to secure new debt or extend their existing facilities.

Apartment buildings, which make up about 40% of the looming maturities, are at the center of the refinancing wave, the broker says. Many US owners of the assets known as multifamily bought their properties using three-year floating rate loans during the easy money era. Interest rate increases since then have eaten up much of their rental income, making it a challenge to secure additional equity.

Rising insurance costs and falling values have added to the pain, leaving about $95 billion of the US properties in distress or at risk of becoming so, according to data compiled by MSCI Real Assets.

“A large portion of the multifamily world is underwater at the moment,” said Catie McKee, director and head of commercial-mortgage backed securities trading at Taconic Capital Advisors. “A lot of the equity is gone, but it’s an asset class that is pretty resilient over time. It’s underwritable, it just needs a capital infusion.”

The looming debt maturities are also a potential headache for Wall Street after many of the floating-rate loans were bundled into the $80 billion commercial real estate collateralized loan obligation market and sold off as bonds to investors. Even so, trouble in the commercial real estate market isn’t seen by investors as a systemic issue for banks.

In response to higher borrowing costs, CRE CLO lenders are modifying loans to try to help keep borrowers afloat until interest rates drop, additional equity can be injected or junior debt such as mezzanine loans can be secured.

With the outlook for interest rates cuts becoming clearer, there’s optimism that large scale distress can be avoided in the wider CRE market.

The number of lenders submitting quotes for debt refinancings has doubled on average this year, said Matthew McAuley, a research director at JLL, who said the funding gap is $200 billion to $400 billion at present.

‘Constrained Cycle’

While some traditional lenders are focused on working out their problem loans, other banks, life insurers and direct lenders are willing to extend more credit, he said.

“It’s been a more constrained cycle this time around,” McAuley added. “Banks don’t want to take over assets if they can put a new business plan in place and get an exit.”

As a result, debt funds may find fewer opportunities to deploy capital than expected, said Willy Walker, Chief Executive Officer at Walker & Dunlop Inc.

“The cycle has healed to the point of CMBS coming back, the agencies are coming back, and banks have started to lend back into commercial real estate,” he said on a video call with reporters earlier this month.