The Great Flood: How CMBS Will Handle $300B Coming Due in 2015-2017
January, 07, 2015
Source: Asset Securitization Report
According to the above article excerpted here, commercial mortgage debt will begin spiking later this year, and the $300 billion plus of loans that need to be refinanced over the three years represents more than 2.5 times the amount that matured between 2012 and 2014.
CMBS issuance was shy of $100 billion in 2014 and is projected to rise modestly above that amount in 2015. Trepp estimates that nearly 20% of the commercial loans maturing over the next three years will require additional capital when the mortgage is either refinanced or the property sold.
Participants are much more optimistic about the ability of borrowers to refinance than they were just a year ago. Both JP Morgan and Wells Fargo have independently indicated that 80% of the commercial mortgages maturing this year will successfully refinance or be re-securitized.
The rising optimism about the fate of these mortgages stems in part from the recovery in property values. Prices of larger properties have increased significantly since the financial crisis, facilitating refinancings with reasonable loan-to-values (LTVs). Yet prices for smaller properties have not appreciated at an equivalent rate as larger, investment-grade assets, resulting in higher LTVs and greater refinancing risk.
Moody's/RCA CPPI Core Commercial Component Index has increased 12.8% over 12 months (as of September data) and, with double-digit annual returns over several years is only 5.8% below its previous peak level in the fall of 2007.
In contrast, real estate research and consulting firm Boxwood Means' composite Small Commercial Price Index (SCPI), which covers 117 metros, has gained 5.9% since September 2013 and is 13.0% below its previous cyclical peak.
"The pricing trend disparity explains why a greater proportion of small balance borrowers might still be 'underwater' or facing some refinancing challenges compared with borrowers with investment-grade property loans," said Randy Fuchs, principal/co-founder of Boxwood Means.
More than 40 CMBS loan origination programs were initiated in the past year according to Moody's. The competition has instilled looser underwriting standards and allowing for loan originations on terms that are more readily within reach of borrowers who originally obtained debt capital before the financial crisis.
Among these new CMBS lenders are firms focusing on small loans under $5 million such as Liberty SBF and R3 Funding. Ray Potter, a founder and managing partner of R3 Funding, claims that lenders are targeting the small balance space because they can generate additional loan production and revenue. "Outside of the gateway cities there has not been as robust lending from the banks and that is where CMBS originators are looking to increase their volume and profit; because you can get a higher profit margin on a $5 million [loan] than you can [get] from a larger loan."
Refinancing may be more challenging for 10-year loans maturing in 2016 and 2017 since borrowers closed these loans with high debt loads at the height of the CRE market. JP Morgan expects that between 65%-70% of these later-maturing mortgages will effectively be refinanced.
For the full article, please visit the Asset Securitization Report: "The Great Flood: How CMBS Will Handle $300B Coming Due in 2015-2017." (Subscription may apply.)