There’s been a lot of talk, and concern, about the immense amount of real estate debt rapidly maturing, as the 10- year loans made in 2005, 2006 and 2007 begin to come due.
More than $300 billion in commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs) and other asset-backed securities (ABS) taken out at the height of the real estate bubble will need refinancing between now and 2017, according to the Mortgage Bankers Association’s “2014 Commercial Multifamily Loan Maturity Volumes Report.” Loans originated by life insurance companies and other mortgage investor groups will add to the total. The question is: can capital providers handle this kind of volume?
The rate of maturing loans is certainly accelerating. About $121.0 billion in commercial and multifamily mortgages held by non-bank lenders and investors will likely mature in 2015, a 32 percent increase from the $91.7 billion that matured in 2014, according to the MBA maturity volumes report.
Maturities by loan type are varied. Of loans held in CMBS, CDOs or other ABS-held mortgages, $73.0 billion will likely mature this year. Life insurance companies may need to refinance about $19.4 billion of their outstanding balances; credit companies and other investors will likely see $17.1 billion mature by year’s end; and $11.5 billion worth of multifamily mortgages held or insured by Fannie Mae, Freddie Mac or FHA/Ginnie Mae may be due to mature in 2015. The MBA report is based on its own analysis of $1.54 trillion of outstanding commercial real estate mortgages, as well as figures supplied by the Federal Reserve and the Federal Deposit Insurance Corporation.
One area of concern is that many of the loans coming due were originally from sources that may not be able to refinance them, either fully or at all. If CMBS capital isn’t sufficient for certain deals—and underwriting terms have certainly tightened since the bubble burst—alternative sources will have to be relied on.
Another worrisome factor involves property valuations. According to “US Capital Trends,” an analysis by Real Capital Analytics (RCA), a bit more than one-third of all CMBS loans that are due to mature in the 2016-2017 period will require either additional capital to be put into the deal or will be worth less than the original loan. But RCA also concludes that we won’t see massive defaults and foreclosures because alternate sources of funds are there.
I agree with this. The securitization industry is rebounding to modest health, and abundant capital is available from more sources than ever. The total volume of unspent committed capital for investments from private real estate funds—called dry powder in the industry—now totals more than $250 billion, 37 percent higher than at the end of 2014, according to Preqin’s “2015 Global Private Debt Report.” That is likely enough money from private funds to address the loan issues.
And there are more options. Yes, traditional banks are still pretty much on the sidelines, but pension funds and insurance companies are active. And opportunities exist for mezzanine financing and direct lending from insurers or wealthy individuals. Meanwhile the number of mortgage REITS originating commercial mortgages is increasing.
Then there’s vast capital from overseas, largely available in government treasures (AKA sovereign wealth funds). Money from China and South Korea, supplemented by pension fund capital from Japan, is expected to continue to seek real estate deals in the U.S., according to Global Emerging Trends in Real Estate 2015, published jointly by PwC and the Urban Land Institute.
Sure, there are bad loans out there or redevelopments gone bad, and they’ll be hurting. And a rise in interest rates could be painful to some. If rates increase by150 basis points, up to 20 percent of the maturing debt may face refinancing challenges, according to analytics company Trepp.
But the concern over debt maturity and refinancing risk that gave folks the willies in the years after the financial crisis is misplaced today. The industry is healthy, and getting healthier. Readily available financing—and refinancing—is one reason why.
R. Byron Carlock Jr. is a principal and the national real estate practice leader at PricewaterhouseCoopers. He can be reached at [email protected].