The great “wall” of maturing commercial mortgage backed securities (CMBS) loans has received so much attention that it almost seems like a mythical creature. The sheer volume of maturing loans is one reason for the attention. In 2015, 2016 and 2017 alone there are more than $350 billion of CMBS loans maturing. Another reason these maturities have everyone’s attention is because a significant portion of these loans are not predicted to be able to be paid off by their due dates.
In 2013, there was speculation that this great wall of approximately $350 billion of CMBS maturities would surely wreak havoc on the whole commercial real estate industry. In the opinion of many experts that year, approximately half of this $350 billion would not be able to be refinanced. The main reasons for the refinancing concern stemmed from the sheer volume of loans needing to be refinanced, as well as the aggressive underwriting standards that were utilized during the origination years of these 10 year loans – 2005, 2006, and 2007.
Annual CMBS issuance during the years 2005, 2006 and 2007 was off the charts from a historical perspective, totaling over $600 billion. The volume of CMBS loans originated during those three years was about two times the average volume of CMBS loans originated today. So, even if these maturing loans had no other “issues,” there is still a shortfall in the funding available for this huge volume.
As the volume of CMBS issuance increased year over year in 2005, 2006 and 2007, the competition between originators became fierce. To stay competitive in those years, it became standard to provide high leverage loans that did not require amortization over the loan term with minimal reserve requirements. Rental rates were also at an all-time high. This combination of characteristics might be okay if real estate prices had only increased during the last 10 years.
By year-end (YE) 2014, there was enough financial information available for each property to get a better assessment of the size of this mythical creature called the Great Wall of CMBS maturities. Using YE 2014 Net Operating Income (NOI) numbers supplied by owners, the various market constituents (including the rating agencies) published estimated LTVs for the maturing loans. To determine the value of the properties, these reporting sources typically applied a market cap rate to the YE 2014 NOI to determine the value of the property and then divided the value by the loan balance to get the LTV.
Although there are various sources of this information and many an article has been written on the subject, the general consensus by late 2014 for the percentage of maturing loans anticipated at 80 percent or greater LTV at maturity date was 30 percent. The good news is that it seemed less disastrous than the original prediction of 50 percent! Contributing to the higher rate of loans predicted to pay off at maturity was the all-time low interest rate environment.
By early 2015, the commercial real estate industry began celebrating because it seemed that this large mythical creature would not devour us after all. It would only devour 30 percent of us. So, whether you are celebrating or not as a commercial real estate owner is completely dependent on whether you are personally in the 70 percent category of owners who can pay off their loan at maturity – or the 30 percent who can’t pay off their loan at maturity.
Now that we are more than half way through 2015, let’s take a look at reality.
According to the CMBS Surveillance Maturity Report for July 2015 published by Morningstar *: as of June 30, 2015, the total remaining amount of loans still to mature in 2015, 2016 and 2017 is now just below $250 billion – approximately $24 billion remaining in 2015, approximately $110 billion in 2016 and $112 billion in 2017. Here are the stratifications by LTV per year of those maturing loans:
According to the report: “Based on Morningstar’s experience covering most of the CMBS universe, our historical analysis indicates that an 80 percent LTV threshold is a reliable barometer of a loan’s likelihood to successfully pay off on time.”
Using this 80 percent threshold, it can be concluded that approximately $8 billion, or 34 percent of the remaining $24 billion maturing this year, will not be able to pay off. In 2016, the number of loans unable to pay off increases to just over $36 billion, or 33 percent, and in 2017, the number is a staggering $53 billion, or 48 percent. This means that just under $100 billion of maturing CMBS loans will likely not be able to pay off between now and 2017.
What is not factored into these estimates is how the inevitable increase in interest rates will affect the borrower’s ability to refinance. And talk of a potential interest rate increase is quite commonplace now.
So, what will happen to the loans where the borrower will not be able to refinance at maturity? The only available options in this situation are (1) for the borrower to fund the negative equity, (2) to grant an extension on the loan when it is deemed that additional time will cure the negative equity situation, (3) allow the borrower to pay the loan off at its current value; which could result in a discounted payoff, or (4) for the CMBS Trust to become the owner of the property through a foreclosure or friendly borrower hand back of the property. High leverage bridge lenders will provide a critical component to these options by providing a unique funding source for borrowers faced with extremely high leverage at maturity.
The final determination on how these maturing loans are handled all resides with a few key industry players, special servicers and controlling class certificate holders, so everyone in the industry is carefully watching to see how the 2015 maturities are getting resolved.
It’s too early to predict the final casualties of the Great Wall of CMBS maturities; however, borrowers should remain as proactive and vigilant as ever about their own personal situation.