A total of 22,514 CMBS conduit loans with a balance of $278.1 billion come due in the next three years. While a seemingly massive wall of maturities, the volume has shrunk by nearly 10 percent over the past nine months. And given continued favorable lending market conditions, it’s likely to continue shrinking.
Indeed, just about every major investor group has increased its holdings of commercial mortgages, according to recent data from the Mortgage Bankers Association, which found that the universe of outstanding commercial mortgages increased by 1 percent during the second quarter to $2.6 trillion.
Banks and thrifts, the largest holders of mortgages, saw their inventory of loans increase by a robust 1.8 percent over the first quarter, to $929.9 billion. CMBS and other securitized vehicles saw their inventory decline to $532.9 billion. That’s largely due to the fact that run-off outpaced new originations - at least through the second quarter. Life-insurance companies, meanwhile, saw a 1.3 percent increase in their inventories, to $345.8 billion.
The open lending spigots have led to a steady pace of loan pay-offs - a big chunk of the loans being securitized today were written to refinance existing CMBS loans - as well as a sharp increase in the volume of defeasance, where loan collateral is replaced by government securities.
Wells Fargo Securities noted that so far this year $12.4 billion of CMBS loans have been defeased, or replaced by government securities. That compares with a volume of $11.3 billion for all of last year and amounts to a near doubling of the $6.4 billion of volume recorded during the year’s first half.
Next year, 6,263 conduit loans with a balance of $64.6 billion come due. In 2016, that increases to 8,230 loans with a balance of $104.3 billion and in 2017, 8,021 loans with a balance of $109.2 billion come due. The volume excludes loans that have been defeased. Because those are backed by government securities, they aren’t at risk of defaulting at maturity.
Even though the volume of loans that mature between 2015 and 2017 steadily has been declining, many of the remaining loans could pose challenges. The thinking has been that loans that easily could be refinanced would have been by now, simply because interest rates are lower than they were when the current crop of maturities were written.
A total of 9,482 loans with a balance of $153.8 billion, or 55 percent of the loans that mature during the 2015-2017 period, have debt yields of 10 percent or less, based on the latest available net operating income figures as compiled by Trepp LLC.
A loan’s debt yield is calculated by dividing a collateral property’s NOI by its loan’s balance and is a gauge used to determine how comfortably the property can carry its debt.
Meanwhile, the collateral for 5,351 loans with a balance of $64.9 billion generates less than 10 percent more than what’s needed to fully service their securitized loans. In other words, their debt-service coverage ratios are less than 1.1x. Lenders typically prefer loans whose collateral can generate 120 percent, or 1.2x, the cash flow needed to fully service their borrowings.
Using DSCR as a gauge, office loans could face the biggest challenges in refinancing, as 1,209 of the loans coming due between 2015 and 2017, with a balance of $27.6 billion have DSCRs of less than 1.1x. Of the retail loans that will be coming due between those years, 1,941 with a balance of $22.8 billion have DSCRs of less than 1.1x.
Among those that might face challenges are the $200 million loan, securitized through Banc of America Commercial Mortgage Trust, 2005-3, against the Woolworth Building in Manhattan. The 811,791-square-foot office property last year generated $12.7 million of net cash flow, which is about 20 percent more than that needed to fully service its non-amortizing loan. But the $13.6 million of NOI it produced results in a debt yield of only 6.8 percent. The well-leased property also supports $50 million of additional debt. And its largest tenant, the General Services Administration, occupies its 112,692 sf under a lease that matures next October. It leases its space on behalf of the SEC, which had reduced its footprint in the building when its lease originally matured two years ago.
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