The volume of loans in commercial mortgage-backed securities (CMBS) will nearly triple in second quarter of 2015, the start of a “wall” of commercial real estate refinancings that will last through 2017 and could raise issues for commercial borrowers whose loans are maturing, according to a Fitch Ratings report.
In a December 19, 2014 report, Fitch said $41.2 billion of loans securitized in its rated CMBS transactions are coming due next year. Huxley Somerville, head of Fitch Ratings’ CMBS group, noted Fitch rates a portion, perhaps half, of the entire CRE loan market. He added that many of the typically 10-year loans originated between 2005 and 2007, often aggressively underwritten, have defaulted. Meanwhile, defeasance, in which borrowers pay a premium to refinance early, has increased for healthy loans.
“These loans that are still performing but haven’t refinanced are in a sort of middle ground and it will be interesting to see what they do,” Mr. Somerville said.
The availability of data in the CMBS market makes it a useful proxy for the overall CRE market. Trepp, a financial research and technology firm catering to the CRE market, estimates more than $70 billion in non-defeased CMBS conduit loans are maturing in 2015, up significantly form the last record high in 2012 of $46.7 billion. The volume increases to well over $100 billion in both 2016 and 2017.
Currently, corporates are refinancing CRE loans with relative ease and often for better terms, because of the premium the asset class provides to investors. That could change should rates spike higher than the Federal Reserve’s anticipated increase. It also remains to be seen how the end of quantitative easing will impact prices for CRE.
Joe McBride, a research analyst at Trepp, said CRE borrowers with loans maturing next year are likely already looking at their refinancing options as close as possible to the beginning of their open period—typically a few months leeway given to borrowers before loans are due to refinance.
“As long as property values and income today are high enough to warrant defeasance, it’s probably worth it for a borrower to look into that option,” Mr. McBride said. “If rates go up to 5.5 percent or 6 percent (from around 5 percent today), that’s a lot of added payment on a $25 million loan.”
Rising rates may make it harder for some borrowers to meet today’s stricter debt-service coverage ratios and other higher underwriting standards compared to when the loans were originated.
“Breaking down hypothetical “new loans” by property type shows office properties will have the hardest time refinancing at current debt and income levels and all property types get worse moving into 2017,” Trepp said in a recent report.
The report noted that a “mini-wave” of refinancings in 2012 that stemmed from five-year loans sent the Trepp delinquency rate to its highest level ever, and the volume of loans maturing that year was only 40 percent of what it will be in both 2016 and 2017.
Corporate finance executives whose CRE loans may face challenges may want to consider analyzing their options sooner rather than later. Trepp adds that almost 20 percent of maturing loans will require additional capital either from current borrowers or new buyers when the loan is refinanced or the property is sold.
“All of this will have to happen in an environment of uncertainty in terms of interest rates, property values, and a shifting landscape in office and retail property usage,” the report said.