Market Trends

• Issue 1. Almost $1.5 trillion of U.S. commercial real estate (CRE) debt comes due for repayment before the end of 2025. Whether it’s a retail space, office building, mall, or warehouse, the big question facing these borrowers is, Who is going to lend to them?

• Issue 2. Small and regional banks were the biggest source of credit to the CRE industry last year. As much as 70% of the other CRE loans that mature over the next 5 years are held by banks, many of them small and regional banks. This wall of debt is set to get worse before it gets better. Maturities climb for the coming 4 years, peaking at $550 billion in 2027. All the development we have witnessed over the past 10 years anticipated a continuation of a low-rate environment. We no longer have that and are not expecting a return to single-digit financing rates during the window in which this mountain of debt will come due. Morgan Stanley estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.

That leads to another unintended consequence for franchisors. Banks are moving quickly into conservative mode. Shoring up and expanding your banking relationships will be necessary in the next 24 months. We’re already getting requests to help banks sort through the expected portfolio performance of brands and adjust their sector and brand focus. You’ll need to know what we know about how credit boxes are changing and how portfolio adjustments are being made.

Dynamic consumer changes that are now with us and the coming repricing in the CRE industry will create growth opportunities. However, among the dozen functions franchisors are responsible for in the franchise business model, three functions—beefing up your site selection team, enhancing your marketing team’s consumer data analytics, and staying on top of lending relationships— must be front and center for you to realize your growth plans.

Darrell Johnson is CEO of FRANdata, an independent research company supplying information and analysis for the franchising sector since 1989. He can be reached at 703-740-4700 or djohnson@frandata.com.