A significant portion of outstanding commercial and multifamily mortgages held by non-bank lenders and investors are set to mature in 2015, a prospect that is of concern to many industry observers. Online lenders such as Realty Mogul may, however, be well positioned to provide competitive bridge financings to refinance maturing loans.
At the beginning of 2014, an estimated $1.4 trillion in commercial mortgages looked due to mature between 2014 and 2017. The amount is significant; some estimates placed the commercial mortgage-backed securities (CMBS) issuances that make up much of the commercial real estate debt portion of that sum to be as much as 2-1/2 times higher than the CMBS amount that matured from 2012 to 2014. A recent Trepp report showed the incoming “wave:”
Loans from the “Bubble” Present Challenges
The worries about the effect of all these loans coming to market for refinancing arise from a number of concerns:
Pre-Recession Loans Were Over-Leveraged. Most of this wave of maturing consists of loans originated in 2005-2007, when CMBS loans in particular were very aggressively underwritten, with high loan-to-value (LTV) and debt service coverage (DSC) ratios. The terms of most of those loans would likely fall short of current market underwriting parameters.
Current CMBS Market Capacity May be Limited. CMBS issuances in 2014 were nearly $100 billion, but that may not be enough to take on the anticipated 20% step-up in volume that may be required annually over the next few years.
Banks May be Somewhat Hamstrung. The Dodd-Frank and Basel III banking regulations enacted in the wake of the Great Recession make it somewhat more costly, in terms of required minimum capital reserves and liquidity, for banks to hold CRE loans. Banks may thus have somewhat constricted capacity to refinance commercial mortgages.
Interest Rates May Rise, Perhaps Decreasing Valuations. Commercial real estate valuations have rebounded, and some observers worry that a “top” may be near. If interest rates also rise, this too may translate to higher cap rates and thus lower valuations.
But There’s Some Optimism…
At the recent Commercial Real Estate Finance Conference held by the Mortgage Bankers Association, economist Jamie Woodwell said that, of the commercial and multi-family loans that were set to mature in 2015, approximately one-quarter have already been refinanced.
“The fourth quarter set record quarterly origination volumes for life-insurance companies, for Fannie Mae and Freddie Mac and for multifamily lending,” said Woodwell. “With low interest rates, rising property values and improving property fundamentals — and in spite of a significant drop in the volume of loans maturing during the year — the preliminary numbers show every major investor group increased commercial and multifamily lending in 2014.”
Other analysts also say that it’s too early to say that the sky is falling. A recent Trepp report said that, even assuming the current stricter lending standards, 82% of loans maturing between 2015 and 2017 would be eligible for refinance at current income levels. It predicts that office properties will have the most difficult time, and that 2017 will be the toughest year for all property types.
This wave of maturing commercial real estate loans from the pre-recession years is a source of some worry for some existing CMBS bondholders. A mini-wave of maturities of 5-yr loans done in 2007 sent 2012 delinquency rates to an all-time high – and volume was only 40% of what’s expected in 2016 and 2017.
The upcoming wave also, however, presents opportunity for commercial loan originators. Increasing property values and low interest rates are positive factors at play in the current commercial real estate market. Some analysts, too, remain positive on the overall outlook, at least in the near term – delinquencies should continue to decline in 2015, according to a recent Morningstar report.
To the extent that markets face capacity constraints, there may also be a solid opportunity for lenders of “bridge” loans to help prevent maturity defaults. Online lenders such as Realty Mogul may be well positioned to provide competitive bridge financing to refinance a maturing loan. These loans may be able to provide borrowers with new capital and the “runway” to re-stabilize a property. If the supply-and-demand fundamentals remain favorable to lenders, then they should be able to extract a sufficient risk premium that reflects the limited supply of capital as compared to the underlying property risk. The next few years could, in fact, turn out to be a great time to be a lender.