The maturities of CRE loans amortized by willing lenders
As $ 430 billion of the $ 2.3 trillion in outstanding commercial and multi-family mortgage debt matures in 2021, borrowers with cash-flow properties will find mortgage capital waiting to soften the landing.
“There is a strong desire for lenders to provide loans right now,” said Jamie Woodwell, vice president of commercial real estate research for the Mortgage Bankers Association. “This means that there is also a lot of capital looking to be invested in mortgages and equity.”
The big challenge in an increasingly vaccinated post-COVID-19 world will be to identify which properties will be able to support debt service. “Lenders are looking at what a property might face shortly to get through the pandemic, and then what conditions might look like on the other side,” Woodwell added.
As was made clear in 2020 at the height of the pandemic, generally industrial and multi-family properties with maturing debt will find plenty of refinancing options, with yield-hungry investors and lenders competing for their loans. activities.
Interim financing can help multi-family borrowers with maturing debt and underperforming properties, according to Mark Jarrell, manager of portfolio loans at Greystone.
“As some properties have been put into a more ‘transitional’ phase over the past year, due to occupancy issues and / or below expected collections, interim financing can serve as an interim solution for incoming loans. due while the client is preparing for a long time. term financing with HUD, Fannie Mae, Freddie Mac or CMBS, ”he explained.
Economist Victor Calanog, head of commercial real estate economics for Moody’s Analytics, points out that the doomsday forecasts did not come true to the extent predicted for the first time, noting that before 2020 there was likely less of “overtaking by industry players and market players”.
In the meantime, the International Monetary Fund, which initially predicted that the COVID-19 crisis would cause the US economy to shrink by 8%, now predicts it will shrink only 4.3% this year.
In other words, the lenders met the standards and the borrowers exercised self-control at the buffet. Debt service coverage ratios have never fallen to worrying levels and there has been little evidence of systemic fire sales so far, although it’s also possible that another shoe will drop.
In March, research firm CMBS Trepp reported that CMBS failure rates in hotels and retail stores in February recorded the biggest improvement since the start of the pandemic, after eight months of steady improvement, despite the devastation of travel and hospitality and retail. .
In February, the accommodation-backed CMBS recorded 16.38% offenders, up from 22.96% over 30 days past due six months ago. Although the pandemic accelerated e-commerce trends by a decade, the default rate on CMBS loans guaranteed by the besieged industry fell to 11.83%, from 14.88% six months earlier.
In addition, the overall CMBS delinquency rate fell 78 basis points in February to 6.80%, which compares favorably with the height of the Great Recession and the historic July 2012 high of 10.34% of delinquents. The 6.80 percent rate, however, is almost quadruple the overall CMBS delinquency rate of 2.04 percent a year ago.
Looking at commercial real estate loan maturities in 2021 by source of capital and loan type, Woodwell points out that there is a relatively low share of longer-term loans maturing at 1% of government-funded businesses and of FHA balances. In addition, only 6% of life insurance loan balances mature in 2021, 16% of CMBS totals maturing, and 30% of lender and other investor-driven loan balances maturing.
Many of the GSE loans made in 2010 or 2011 have already been refinanced or the property has been sold or the balance has been paid off due to low interest rates and favorable market conditions. Likewise, loans to life insurance companies – possibly 7-year loans made in 2014 – have already been refinanced, repaid, or the underlying property sold.
This leaves short term CMBS market adjustable rate loans or loans from investor-focused lenders that have been made more recently, perhaps to reposition a property, or as a bridge between construction and permanent financing, or even just for a shorter period. hold on. Unlike long term fixed rate loans which have benefited from refinancing at lower interest rates, shorter term adjustable rate loans have naturally turned to lower cost capital.
Signs of distress
According to Woodwell, investors have already come up with four broad categories of properties in terms of pandemic impact: 1) Countercyclical property types like industrial properties, data centers, individual rentals and self storage that have been boosted by the pandemic; 2) the types of properties such as retail businesses that were undergoing systemic changes accelerated by the pandemic; 3) properties such as offices that may have been fundamentally altered due to COVID-19; and 4) properties such as multi-family retail centers, grocery stores or hotels, which will likely pick up when the virus is in the rearview mirror and the economy has recovered.
That’s not to say that there hasn’t been distress in all areas and that we won’t see much more before the end. A recent Moody’s report found that the distress in the multi-family sector, for example, was concentrated on the rent side, which has been hit hard by foreclosure policies and eviction moratoria that have slowed the formation of new households. And these rent cuts have been felt more severely in urban markets than in suburban ones. In 2020, effective rents in San Francisco fell 14.9%, followed by New York City with a drop of 12.2%, San Jose with a negative percentage, Washington DCat 8.1 percent and Oakland-East Bay down 5.9 percent.
Moody’s also predicts that office rents will suffer as remote working ultimately impacts the demand for space. Despite reports of vacancies of up to 90% at the height of the pandemic as workers cower at home, the vacancy rate in country offices rose only 90 basis points, from 16% to the end of 2019 to 17.7% at the end. from 2020.
But so far not only have lenders been willing to grant multiple forbearances, but they have also pushed back loan maturity dates to avoid incurring losses. However, as the economy reopens and transaction volumes increase, there will be price discovery for all types of commercial real estate – even multi-family and industrial – and greater opportunities for investors to capitalize on real estate. unstable loan maturities.
Lender for everyone
Brian Stoffers, Global President of Debt and Structured Finance for Capital Markets at CBRE, doesn’t anticipate much distress for the $ 430 billion mountain of debt that will fall due in 2021, with a few well-noted exceptions in the hospitality and retail sectors.
“There is so much capital available, not only for equity but also for debt,” he said. “We closed our doors last year with over 370 different lenders, including over 170 different banks, and the supply of debt available is absolutely not limited.”
In 2020, ceiling rates for industrial and multi-family properties fell, and even offices, although more problematic to refinance this year, were amortized by leases of seven to ten years. If you have debt maturing this year, Stoffers advised not to wait until the last quarter to start looking for alternatives, such as debt funds ready to make bridging loans for a higher occupancy rate, for example. example.
“There is usually an outlier – a lender willing to go the extra mile for the transaction because there is so much competition,” he added.