The next three years will be somewhat of a trial by fire for the commercial real estate business. Property owners and managers and investors in commercial mortgages will need to stay on top of the upcoming challenges if they don’t want to relive the same crises they faced during the Great Recession.
In August, the delinquency rate on commercial mortgage-backed securities rose for the first time in over a year, according to Trepp LLC. While that six basis-point increase, to 6.10 percent, still leaves the figure nearly 300 basis points below the year-earlier level and is hardly a cause for panic, it may be a harbinger of more challenging times ahead.
“All good things must come to an end at some point. The days of double-digit month-over-month improvements for the CMBS market may be behind us for a while,” says Manus Clancy, senior managing director at Trepp. The company notes that the rate of distressed loan resolutions has continued to taper off from the pace of the past two years, indicating that the “sizeable improvements seen in 2013 are likely a thing of the past.”
But there’s an additional problem to worry about: The “wall” of commercial debt maturities slated to hit the market over the next three years. If some of those properties are unable to refinance, debt holders could be left holding the bag.
According to a separate post from Trepp, CMBS issuance volume peaked in 2005, 2006 and 2007. The vast majority of loans made then were 10-year balloon loans, creating a “wall of maturities” that will come due over the next three years. More than $300 billion in CMBS will mature, Trepp estimates, or nearly 60 percent of the entire CMBS public conduit universe. That’s more than 2.5 times the amount that matured over the past three years.
While commercial property values have certainly rebounded in many markets and interest rates remain near record lows, there’s no guarantee that will continue. “Rising rates and higher relative underwriting standards (new risk retention regulations come into effect in 2017) could lead to volatility … just as more loans than ever before reach maturity,” Trepp warns. Moreover, almost 20 percent of those loans will require additional capital, either from current owners or new buyers.
Office and retail properties make up nearly two-thirds of the loans maturing in the next three years, Trepp says, adding that office properties will have the hardest time refinancing at current debt and income levels.
If you’re a property manager or investor in commercial property or CMBS, how do you stay on top of this to make sure you’re not caught flat-footed?
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Trepp notes that property values have rebounded in many markets, but that’s being offset by many retailers continuing to close stores, big banks and law firms cutting their office footprints, and new construction slowing down multifamily appreciation.