Investors now have one less thing to worry about: despite warnings from experts, another wave of delinquencies, defaults and foreclosures did not strike commercial real estate in 2012.
Instead, delinquency rates continue to slowly, steadily improve. “Every quarter, delinquency rates are ticking lower and lower,” says E. J. Burke, executive vice president and group head for KeyBank Real Estate Capital.“Our asset quality today is better than it has been since before the crisis.”
Last year was supposed to be a big, bad year for delinquent loans. More than $100 billion in commercial and multifamily mortgages came due in 2012. Many experts worried that there would be a toxic wave of overleveraged mortgages, originated in the easy-money days of the real estate boom, based on lax underwriting and inflated property values. They would be impossible to refinance using today’s properties values and tighter underwriting rules. Another catastrophe could be on its way.
Instead, delinquency rates continued to improve in the fourth quarter. “We saw delinquency rates decline for every major investor group,” says Jamie Woodwell, MBA’s vice president of commercial real estate research.“Things weren’t nearly as bad as they could have been.”
Even CMBS delinquencies have improved, declining from a high of nearly 9 percent early in 2012, according to MBA. In the fourth quarter, 8.7 percent of loans held in CMBS were 30 days late or more in their payments. That’s 13 basis points lower than the quarter before. CMBS delinquency rates are slowly easing from a peak of 8.97 percent in the second quarter of 2012.
In fact, all lender types improved last year, including banks, Fannie Mae and Freddie Mac and life insurance companies. These other lender types reported much lower delinquency rates than CMBS—though to be fair, conduit lenders include properties in foreclosure in their numbers, and most other lenders do not.
We survived 2012
“During the recession, and even in more recent years, approaching commercial and multifamily mortgage maturity volumes were referred to as akin to a ‘ticking time-bomb’ that would overwhelm the real estate finance markets,” Woodwell says.
A total $150.6 billion in commercial mortgages matured in 2012, according to MBA. As the deadlines approached, these properties would need to find new financing to pay off the remaining balances of their maturing loans. The loans had often been made five years before, near the peak of the boom, sometimes through CMBS lenders offering high leverage. Property values had collapsed since then. Many borrowers owed more on the maturing loans than the properties were now worth.
Healing markets for commercial real estate cushioned the blow. Rising occupancy rates, rising net operating incomes and rising property values all helped borrowers make their payments and sell or refinance the properties.
Now that commercial real estate has made it past 2012, the future looks less challenging. Fewer loans will hit the end of their loan terms in 2013: just $119.5 billion.
“The volume of loans maturing in 2013 and 2014 will mark cycle lows for loan maturities, each representing less than 8 percent of the outstanding balance of loans,” says Woodwell. Most of these loans were originally closed ten years ago in 2003, before real estate prices inflated in the boom and crashed in the crisis. The next potential wave of problems comes in 2015, 2016 and 2017—when 10 year loans originated in the boom years come due.
Lenders are also finding investors to help clear out their inventory of distressed loans. “We have seen a high percentage of maturing loans pay off,” says KeyBank’s Burke. “There is a tremendous amount of capital that wants to be invested in income property in the U.S.” For example, investors are now paying $1.02 to $1.05 on the dollar to buy distressed mezzanine loans for hotel properties that KeyBank bought into before the crash. Until recently investors would only pay 80 to 90 cents on the dollar for that paper.
“People are searching for yield,” says Burke. “That’s illustrates a lot of what’s going on.”