By Susan Persin,
senior director of research, Trepp
As the 10-year anniversary of the previous market peak in commercial real estate approaches, lenders and investors are looking ahead to a wave of refinancing that could spell trouble for the market.
An estimated $1.4 trillion in commercial mortgages will mature between 2014 and 2017, and CMBS loans represent about one fourth of the total. Trepp data shows about $346 billion in CMBS loans maturing between 2014 and 2017, with a peak of $113 billion maturing in 2016.
Among the six major regions of the United States, the Northeast has the greatest amount of loans maturing between 2014 and 2017, at almost $100 billion.
The Northeast represents 30% of the total, followed by the Pacific and Southeast regions, each with almost 20% of maturing loans. The Midwest, Southwest, and Mountain states each represent less than 15% of maturing loans.
In order to estimate how these maturing loans will fare, we took a look at the current trends in newly originated loans.
Trepp data show that most commercial property loans underwritten in 2013 have an LTV ratio of about 60%, while multifamily loans have an LTV that is about 70%.
In some cases, these recent LTV ratios are well below the LTV ratios of maturing loans, which raises the question of whether maturing loans can be refinanced in today’s more restrictive lending environment without requiring additional equity.
For this analysis, we estimate the current value of properties with maturing loans by capitalizing recent NOI with a recent cap rate. We assume that the borrower is refinancing the existing loan amount and will not take out additional equity.
As we project the analysis to 2017, the LTV ratio of new loans is assumed to stay steady at today’s levels. The analysis also assumes that current cap rates and NOI do not change going forward, resulting in stable property values through 2017.
Multifamily is among the healthiest property types, so borrowers will face the least difficulty refinancing.
On average, multifamily loans have a higher LTV ratio than other commercial properties, and recent multifamily loans have been issued at LTV ratios that exceed those of maturing loans originated between 2004 and 2007.
Relatively high LTVs for new loans in a sector that is performing very well point to a strong refinance environment for multifamily borrowers. Despite concerns about apartment overbuilding and the recovering single family market, multifamily vacancy remains low and demand for rental housing is strong.
Due to the strength of the market and the sector’s higher LTV ratios, multifamily borrowers in many parts of the country will face little distress when their loans mature, at least during the next two to three years.
Multifamily loans in Northeast states could become problematic in 2016, while Pacific and Southeast states may face problems beginning in 2017.
The lodging sector is currently performing very well, but because of the cyclical nature of the hospitality business and its strong correlation to economic activity, it has significant potential for volatility.
For lodging properties, borrowers trying to refinance loans should be able to meet loan-to-value requirements in 2014 and 2015. It is not until 2016 and 2017 that borrowers may need to inject more equity to meet current underwriting standards.
Office loans maturing in 2017 have a much higher LTV ratio than those maturing in 2014.
The office sector’s recovery has been slow and uneven. Top markets are performing well, but lenders have been more restrictive in secondary and tertiary markets.
In 2014, borrowers should have little trouble refinancing, as current LTV ratios are higher than those of maturing loans. Between 2015 and 2017 however, refinancing troubles could emerge, barring significant property value appreciation or a loosening of underwriting standards.
By 2015, the LTVs on maturing office sector loans will exceed those of new loans in all regions.
By 2017, the Midwest region will face the greatest problems, followed by the Northeast, Southeast, and Mountain states.
Industrial borrowers may face significant challenges refinancing maturing loans from a loan-to-value perspective. In 2014, the LTV ratios for maturing loans are close to those for recently originated loans, which may limit refinancing problems, but the story changes in 2015. Industrial is one of few product types where the LTV ratio for maturing loans decreases in 2017.
Retail could prove the most problematic real estate product type. The LTV ratio for loans maturing between 2014 and 2017 is consistently higher than those of recently originated loans. Retail market fundamentals are improving slowly, and investor demand for assets has generally improved.
At the same time, ongoing economic uncertainty and higher taxes have had a negative impact on spending and retailers, all of which will affect lenders’ willingness to refinance maturing loans.
In almost every region of the country, retail borrowers will find it difficult to meet current LTV requirements when refinancing maturing loans.
By 2017, the Pacific and Northeast states will require the greatest injections of equity to refinance at current LTVs.
Not All Loans Will Be Problematic
Under our current assumptions, which include stable property values, many borrowers seeking to refinance will be unable to meet current loan-to-value requirements without injecting additional equity into their properties.
The problem will affect industrial and retail properties before office and lodging, and will be less of an issue for apartments.
However, increasing property values and low interest rates are positive factors at play in the current commercial real estate market.
Additionally, lenders have often been willing to work with borrowers to resolve loan issues through modifications and extensions.