Quantifying Risk of Office-Backed CMBS Loans
A majority of $25.3 billion in office CMBS loans coming due this year will face problems in refinancing.
Many in CRE — and many without — have noticed that the office sector is under serious challenges and pressures. Green Street has quantified the risks through the current state of CMBS loans either secured by office properties or in portfolios where they account for more than half of the outstanding balance.
By the close of 2023, approximately $25.3 billion of such loans will have been set to mature across 245 loans with a total property count of 602. The majority will face “significant refinancing challenges, though of that number, $16 billion worth have extension options.
To reach this step, the firm used its automated valuation model to estimate the underlying value of the properties. Next, it calculated a mark-to-market value for the properties, and then current values and NOI to project proceeds.
The overall weighted average shortfall of the loans was 35% of the current balance and, equally a problem, the loan-to-value was about 94%, which is enormously leveraged. Loans without extension options “may struggle to refinance and potentially face maturity default.”
That view is an average one. For the 17 loans and 24 properties in the highest risk measured by percentage of shortfall, the debt yield in the first quarter of 2023 was 4% and the shortfall as a percentage of the current balance, 63%. In the next category down, with 12 loans and 12 properties, the shortfall was 53% with a 6% debt yield.
In a separate piece, Green Street noted that CMBS loan performance hadn’t seen significant change in 2023 Q1 from the prior quarter, with 30-day plus delinquencies holding steady at 3.3%. However, when broken down by property type, the figures look different.
Office delinquencies were 2.96%. Three other categories — strip malls (4.20%), lodging (4.47%), and mall (13.04%) — were in worse shape. Total percentages of loan defaults ran from a low of 0.12% for strip malls to a high of 0.86% for malls, with offices clocking in at the second highest rate of 0.36%.
“CMBS loan underwriting LTV and DSCR are expected to tighten in the near term,” Green Street noted. “The decline in the Industrial sector’s LTV for the past two quarters is likely a precautionary measure by lenders due to the expectation of declining appraisals.”