NEW YORK CITY—With servicers skillfully negotiating the year's wave of CMBS maturities, the expectation of an increase in special servicing inventory hasn't come to pass, according to S&P Global Ratings.” At the end of 2016, we had anticipated CMBS active special servicing inventory would experience growth throughout 2017 because of the large volume of maturing loans that could not be refinanced,” S&P said. In fact, the ratings agency said Monday that with volume down 10.4% year-over-year to $26.7 billion as of June 30, special servicers' volumes are now at the lowest levels since 2008.
“Lending markets have been more receptive in providing long-term takeout financing, particularly because alternative capital sources, including mortgage REITs, bridge lenders, and opportunity funds, have emerged,” says Steven Altman, servicer analyst with S&P. “Additionally, 2017 CMBS issuance levels have been greater than S&P Global Ratings and other market participants initially anticipated.”
Accordingly, Morningstar Credit Ratings reported late last month that the October payoff rate of maturing loans in CMBS rose above 80% for the second time in the past three months, climbing to 81.2%, up from 75.3% in September. “The maturity payoff rate for CMBS loans, which has been at or above 70% for 13 of the past 15 months since August 2016, has exceeded our expectations,” Morningstar said in November. “What has been most surprising is that borrowers with highly leveraged loans have successfully repaid them at their maturity dates, which indicates that there is liquidity in the commercial real estate market and that lenders and investors don't see property values declining significantly anytime soon.”
Other factors contributing to the higher-than-expected payoff rate are low interest rates and the availability of additional subordinate debt. Morningstar expects the maturity payoff rate to remain above 70% for the remainder of this year, “as there are fewer CMBS loans left to pay off and we expect continued non-CMBS financing for loans with weaker metrics.”
In addition, S&P said Monday, the average remaining age of active CMBS specially serviced inventory has trended modestly lower during the course of this year. Currently it's below peak levels, as newly transferred assets have become more prominent since the influx of maturity defaults that began in 2015.
Despite these positive trends, delinquency rates have modestly increased, S&P says. In addition, within the overall CMBS market, loan complexity has increased, and as a result the average CMBS loan size has increased to $17.3 million, the highest level since '08.
There's also the matter of a lower projected volume for new CMBS issuance in 2018. Even as the current year is expected to finish with total issuance at or close to $90 billion, Larry Kay, senior director with Kroll Bond Rating Agency, said last month that KBRA expects private-label CMBS issues to taper to about $65 billion, in line with the historical mean.
“We expect that single borrower issuance will remain in line with '17, but conduit issuance may fall as much as 30%,” said Kay. That has implications for the CMBS market's contribution to next year's scheduled maturities, although maturity levels will be considerably lower than this year's. However, S&P says, with adequate staffing levels at special servicers, “we believe the industry is still positioned to handle moderate increases in workout volume.”
“Lending markets have been more receptive in providing long-term takeout financing, particularly because alternative capital sources, including mortgage REITs, bridge lenders, and opportunity funds, have emerged,” says Steven Altman, servicer analyst with S&P. “Additionally, 2017 CMBS issuance levels have been greater than S&P Global Ratings and other market participants initially anticipated.”
Accordingly, Morningstar Credit Ratings reported late last month that the October payoff rate of maturing loans in CMBS rose above 80% for the second time in the past three months, climbing to 81.2%, up from 75.3% in September. “The maturity payoff rate for CMBS loans, which has been at or above 70% for 13 of the past 15 months since August 2016, has exceeded our expectations,” Morningstar said in November. “What has been most surprising is that borrowers with highly leveraged loans have successfully repaid them at their maturity dates, which indicates that there is liquidity in the commercial real estate market and that lenders and investors don't see property values declining significantly anytime soon.”
Other factors contributing to the higher-than-expected payoff rate are low interest rates and the availability of additional subordinate debt. Morningstar expects the maturity payoff rate to remain above 70% for the remainder of this year, “as there are fewer CMBS loans left to pay off and we expect continued non-CMBS financing for loans with weaker metrics.”
In addition, S&P said Monday, the average remaining age of active CMBS specially serviced inventory has trended modestly lower during the course of this year. Currently it's below peak levels, as newly transferred assets have become more prominent since the influx of maturity defaults that began in 2015.
Despite these positive trends, delinquency rates have modestly increased, S&P says. In addition, within the overall CMBS market, loan complexity has increased, and as a result the average CMBS loan size has increased to $17.3 million, the highest level since '08.
There's also the matter of a lower projected volume for new CMBS issuance in 2018. Even as the current year is expected to finish with total issuance at or close to $90 billion, Larry Kay, senior director with Kroll Bond Rating Agency, said last month that KBRA expects private-label CMBS issues to taper to about $65 billion, in line with the historical mean.
“We expect that single borrower issuance will remain in line with '17, but conduit issuance may fall as much as 30%,” said Kay. That has implications for the CMBS market's contribution to next year's scheduled maturities, although maturity levels will be considerably lower than this year's. However, S&P says, with adequate staffing levels at special servicers, “we believe the industry is still positioned to handle moderate increases in workout volume.”
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