NEW YORK CITY—Thus far in its navigation through the waves of 2005-2007 CMBS maturities, the commercial real estate industry has managed to steer clear of the shoals that could lead it to run aground. Just over 94% by balance of the $80.9 billion in non-defeased, non-delinquent securitized loans that came due between January 2015 and February of this year paid off, with just 0.29% in losses. Although the CMBS delinquency rate reached its highest level on record as nearly $50 billion in five-year loans from '07 came due amid the still-recovering market of 2012, by '15 the volume of new issuance was enough to digest the 10-year maturities.
Continued smooth sailing ahead? Not necessarily. “Viewing the performance of 2015 maturities, solid aggregate NOI growth and record CRE price levels in a vacuum would lead to a very positive outlook for 2016 and 2017 maturities,” according to a report this week from Trepp LLC. “Unfortunately, the bottom-up view of the market is only half of the story and the negative macro factors coming from the top down could significantly hamper the CMBS market's ability to handle the next seven quarters of increasing maturing volumes.”
Those negatives macros have piled up in recent months. For starters, Trepp says, “Oil's slide since last year has hammered high yield fixed income, bank balance sheets and energy company stocks. Pair that with the first Federal Reserve rate hike and growth concerns in China, and the result has been quickly widening new issue CMBS spreads.”
Then there are “increasingly stringent capital rules and heavy regulatory costs” leading banks to reduce their CMBS exposure. “Add a second potential Federal Reserve rate hike in 2016 to those macro and regulatory headwinds and the outlook becomes slightly dubious for the more-than-$200 billion in non-defeased, non-delinquent loans coming due between now and the end of 2017,” according to the Trepp report.
Another early warning sign comes from Fitch Ratings, which recently noted the increasing hold times on REO assets, up 10% over the past year. That portends higher losses for CMBS, according to Fitch.
Along similar lines, Trepp said Thursday that CMBS loss severity hit a new record level in March, due to the month's three largest loans all paying off with 100% losses.
To gauge how the next two years' worth of maturing CMBS loans might perform, Trepp compared them to the most recent six months' worth of new conduit originations based on cap rate, LTV, DSCR and debt yield. The results weren't encouraging.
“On a DSCR basis, almost $31 billion in maturing loans will not be able to refinance their entire balance,” according to Trepp. “On an LTV basis, almost $93 billion would need additional equity in order to refinance at current income and cap rate levels,” a number that approaches $100 billion if the debt yield parameter is applied.
That doesn't mean all these loans will default, though. “There are many on the margin that will either need non-CMBS lenders to provide higher leverage or sponsors willing to invest more equity,” Trepp says. “Bridge, mezz and non-bank lenders are in a position to issue some serious volume in the next two years working on loans in that marginal area between totally refinance-able and those in need of some wiggle room.”
Continued smooth sailing ahead? Not necessarily. “Viewing the performance of 2015 maturities, solid aggregate NOI growth and record CRE price levels in a vacuum would lead to a very positive outlook for 2016 and 2017 maturities,” according to a report this week from Trepp LLC. “Unfortunately, the bottom-up view of the market is only half of the story and the negative macro factors coming from the top down could significantly hamper the CMBS market's ability to handle the next seven quarters of increasing maturing volumes.”
Those negatives macros have piled up in recent months. For starters, Trepp says, “Oil's slide since last year has hammered high yield fixed income, bank balance sheets and energy company stocks. Pair that with the first Federal Reserve rate hike and growth concerns in China, and the result has been quickly widening new issue CMBS spreads.”
Then there are “increasingly stringent capital rules and heavy regulatory costs” leading banks to reduce their CMBS exposure. “Add a second potential Federal Reserve rate hike in 2016 to those macro and regulatory headwinds and the outlook becomes slightly dubious for the more-than-$200 billion in non-defeased, non-delinquent loans coming due between now and the end of 2017,” according to the Trepp report.
Another early warning sign comes from Fitch Ratings, which recently noted the increasing hold times on REO assets, up 10% over the past year. That portends higher losses for CMBS, according to Fitch.
Along similar lines, Trepp said Thursday that CMBS loss severity hit a new record level in March, due to the month's three largest loans all paying off with 100% losses.
To gauge how the next two years' worth of maturing CMBS loans might perform, Trepp compared them to the most recent six months' worth of new conduit originations based on cap rate, LTV, DSCR and debt yield. The results weren't encouraging.
“On a DSCR basis, almost $31 billion in maturing loans will not be able to refinance their entire balance,” according to Trepp. “On an LTV basis, almost $93 billion would need additional equity in order to refinance at current income and cap rate levels,” a number that approaches $100 billion if the debt yield parameter is applied.
That doesn't mean all these loans will default, though. “There are many on the margin that will either need non-CMBS lenders to provide higher leverage or sponsors willing to invest more equity,” Trepp says. “Bridge, mezz and non-bank lenders are in a position to issue some serious volume in the next two years working on loans in that marginal area between totally refinance-able and those in need of some wiggle room.”
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