Ten years ago, it was very easy to get a loan. Property values combined with low interest rates and loose underwriting standards created an unsustainable “golden age of CMBS originations.” Now, all of those loans originated before the Great Recession are approaching maturity but in a very different refinancing landscape.
Almost 35,000 fixed rate conduit loans will be maturing through 2017. That equates to over $400 billion of outstanding debt. While many borrowers have been focused on whether interest rates will remain low long enough for them to refinance at maturity without incurring the cost of defeasance or prepayment fees, they may not have considered whether the lending community will have the capacity for the looming wave of maturities, especially in a rising interest rate environment with more conservative underwriting.
CMBS originations have steadily increased over the past three years, with annual volumes of $24 billion, $32 billion and $48 billion, respectively, since 2011. Given new risk retention rules, the fragile economic recovery and the collective desire to avoid a repeat of 2007 and the ensuing recession, a more gradual, sustainable expansion of new loan volume seems more likely. Assuming 25% annual increase from 2014 – 2017, the projected new loan volume wouldn’t come close to satisfying the demand for new loans spurred by corresponding maturities in 2015, 2016 and 2017.
While many borrowers have a negative reaction to the cost to prefund future interest due on an existing loan through a defeasance transaction, when used strategically to take advantage of currently available financing options, defeasance can be a valuable tool to protect real estate assets from future risk and uncertainty. The cost pales in comparison to the cost of defaulting on the loan at maturity and navigating through the complex process of restructuring or extending your loan because capital became too scarce or a rise in interest rates put the new loan out of the money.
Many signs, such as tighter lending standards, rising interest rates and new lender risk retention rules, point to an increasingly risky and uncertain refinancing landscape for borrowers from 2015 – 2017. When you factor in the rush of demand from maturing loans, the lending environment could quickly turn against borrowers – even those with stable, performing properties. With a finite amount of money to lend, lenders will dictate the terms and rates, and spreads will likely rise – causing many borrowers to scramble to pay off their loans when they come due. And don’t forget how quickly CMBS lenders can stop lending and close-up shop if aggressively underwritten 2005 – 2007 vintage loans cannot be refinanced resulting in short sales, declining real estate values and a new recession. We don’t mean to dampen the tide of optimism in the market, but we’re not completely out of the woods yet.
If you have a loan maturing in 2014, hopefully you are already talking to your mortgage broker. For those with a loan maturing in 2015 – 2017, you are now on notice about the massive number of owners you’ll be competing with for refi dollars.