This year marks the first of the oncoming “wave of CMBS maturities” for vintage 10-year loans originated from 2005 to 2007. More than $300 billion in loans are due to mature over the next three years, according to Trepp LLC, and nearly 30 percent of the maturing balance will come from loans backed by retail properties.
Although experts expect the maturities will lead to increasing CMBS origination, many of the properties up for refinancing will be reappraised at values very different than they were 10 years ago, forcing borrowers to “right-size” by contributing more equity.
“Based on 2014 refinancing activity, we can assume that about 70 percent of loans will be able to refi with no problem,” says Tanya Little, CEO of Hart Advisors Group, a Dallas-based firm that specializes in loan restructuring and modifications. “The remaining 30 percent will likely have a problem.”
More CMBS lenders active
Borrowers have a much better chance of refinancing their retail properties today than they did two years ago. And though it might surprise a lot of people to realize this, there are far more CMBS lenders today than 10 years ago, Little says.
In 2005, there were less than a dozen lenders active in the CMBS market; today there are 40 lenders. “More competition means better terms and less scrutiny on underwriting,” Little says.
But that doesn’t mean underwriting has loosened to an imprudent level. “It’s not what it was in 2005, 2006, or 2007,” says Claudia Steeb, managing director in HFF’s Pittsburgh office.
Although retail is one of the preferred property types for CMBS lenders, they’re focused on occupancy costs and competitive position in the marketplace. Steeb says B-piece buyers are particularly concerned with occupancy costs since retailers’ profitability is key. “We’re seeing some rents written down to achieve acceptable occupancy costs,” Steeb says.
Co-tenancy is another underwriting hot button. “If you look at some of the retail properties that were given back during the recession, they had co-tenancy issues,” Steeb notes. “With co-tenancy, if you lose an anchor, tenants can pay reduced rent, and that causes NOI to drop significantly.”
Properties that tick off all the boxes on a CMBS lender’s checklist can get interest-only loans with 75 percent LTV. At lower leverage, perhaps 50 to 55 percent, borrowers may be able to swing IO for the whole term.
Looking at 2015 retail maturities, 14 percent were reported as delinquent in February. An additional 2 percent of 2015 maturities are currently with the special servicer, according to Trepp. Another 7 percent and 7.7 percent of 2016 and 2017 retail maturities are already delinquent, respectively.
By and large, the 2015 delinquencies are either REO or in the process of foreclosure. Trepp expects these properties to report losses upon disposition.
“Even though we continue to see some consolidation with national tenants, I think most people feel pretty good about retail today, particularly in larger markets,” Little says. “But there are some markets that have not recovered from the recession, and the properties in those markets might be troubled.”
According to The Green Street Commercial Property Price Index, property values have risen at a strong pace over the past year and prices of institutional-quality commercial real estate are now about 15 percent higher than the peak levels reached at the top of the last cycle.
“As occupancy and rental rates have increased, retail property values have rebounded,” Little notes. “But some property values haven’t rebounded to pre-recessionary levels because they have vacant space or they’re leasing at lower rates.”
Higher vacancy rates and/or decreased rental rates leads to lower income, and ultimately lower valuations, possibly causing trouble for these loans when it comes time to refinance.
“Some of these maturing CMBS loans will need to be ‘right-sized’,” Steeb says. “And if that’s the case, a new CMBS loan might not be the right fit. But CMBS isn’t the only option today; local and regional banks are actively lending.”
Of the maturing retail loans, more than 15 percent have been assigned appraisal reduction amounts (ARAs), according to Trepp. ARAs can serve as both a warning and estimate on the level of losses that may result based on the borrower’s missed principal and interest payments. About half of those loans are delinquent.