Frank Romeo, president of Partner Engineering and Science Frank Romeo, president of Partner Engineering and Science

LOS ANGELES—As around $200 billion of maturing loans comes up for renewal over the next few years, the CMBS market is set to soar with huge potential for lenders to increase their books. Those thoughts are according to Frank Romeo, president of Partner Engineering and Science, who recently caught up with for out all things retail coverage around the ICSC RECon event last week.

Romeo tells that some zombies may be lurking within this wall of maturities. “With Freddie and Fannie claiming much of the multifamily offering, many of the renewals will involve retail assets—in fact, Trepp estimates that nearly 30% of maturing CMBS loans are backed by retail properties.”

Lenders must be particularly careful to consider functional obsolescence risks to ensure they’re not left with underperforming asset types in their portfolio, he continues. “The emergence of online shopping has had a profound impact on retail real estate, with many big-box and traditional retail assets forced to close their doors, causing developments to lose anchor tenants. These obsolete assets will have loan-to-value ratios nearing 100%, and will therefore have a very difficult time being refinanced, particularly in today’s tightened regulatory and credit climate.” Mirroring Trepp’s estimation, a significant percentage of CMBS transactions that Partner Engineering & Science works on include a retail component, and Romeo expects that least $60-billion of CMBS debt will be adversely affected by retail closures. “Retail assets that looked like blue-chip deals 10 years ago now carry an elevated risk of term or maturity default—creating the argument that ‘future obsolescence’ should be considered as part of lenders’ standard underwriting procedures.”