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Commercial debt played a major part in the commercial real estate boom of the mid-2000s. Commercial mortgage backed securities (CMBS) issuance rose dramatically from $94 billion in 2004 to $168 billion in 2005 and hit a peak of $230 billion in 2007. Many of the loans issued during that period, and repackaged, were 10-year loans, which have been coming up for refinancing in 2014 – 2017. According to Trepp, about $330 billion in commercial loans are scheduled to mature over the four-year period, totaling about 28,000 loans.
The majority of the loans are for office and retail assets, which have recorded slower comparative recoveries in fundamentals post-recession. Office vacancies still hover around the 16.0 percent mark, while retail availabilities have just nudged below 10.0 percent.
In terms of volume, $79 billion of CMBS is expected to mature in 2015, with an additional $111 billion in 2016 and a similar $111 billion volume coming due in 2017. Commercial investors have expressed concern over the large wave of refinancing coming due, in light of the potential for rising interest rates. According to Trepp—accounting for current interest rates—about 6.4 percent of maturing loans would not meet the minimum refinancing requirement of a 1.2x debt-service coverage ratio (DSCR). Moreover, assuming that rates climb 150 basis points, the percentage of outstanding loans who would not meet the minimum DSCR rises to 15.7 percent.
How do commercial REALTORS® find this challenge impacting their markets?
Based on the Commercial Lending Trends 2015 report, CMBS loans made up a scant 1 percent of capital in REALTORS® markets during 2015, a figure which is consistent over the past few years. In turn, as market conditions have improved over the past few years, asset valuations have risen in tandem with net operating income (NOI). Commercial REALTORS® reported that NOI for properties they sold or leased increased in 48 percent of markets over the past five years.
As lending conditions eased, the share of transactions failing due to refinancing has been on a downward trend. Refinancing difficulties caused deal failures in 50 percent of transactions during 2012. The share dropped to 42 percent in 2013 and 21 percent in 2014. Based on REALTORS® latest data, refinancing failures dropped to a low of 16 percent in 2015.
Based on commercial members’ feedback, the average DSCR provided a silver lining in 2015, with an average of 1.3x. The DSC ratio was reported at 1.3x percent in 2012, and 1.4x percent in both 2013 and 2014. With the ratio slightly higher than the 1.2x minimum and the Federal Reserve being cautious about a rate hike, maturing debt in commercial REALTORS® markets has a certain degree of buffer over the next couple of years.
For more information and the full report, access NAR’s Commercial Lending Trends 2015.
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