2017 CMBS Loan Maturities Face Challenges

Refinancing today’s maturing debt will prove difficult

Wagner_Dan_AtlantaThe challenges surrounding securitized mortgages, or Commercial Mortgage Backed Securities (CMBS), have been looming for years. An enormous volume of commercial real estate originally financed with 10-year CMBS debt (and at prior peak market values) is maturing. But refinancing today’s maturing debt will prove difficult, mainly because most of the performing, higher-quality loans originated a decade ago have been resolved through defeasance or refinanced, leaving only the lower-quality loans containing underperforming assets, many of which were also underwritten with pre-recession cash flow assumptions. This “wall of maturities” is expected to total $100 billion nationally in 2017, with an estimated default rate of 13 percent, according to S&P Global Ratings.

Atlanta’s CMBS loan losses have been significant, totaling $1.7 billion over the past six years, which trails only New York and Las Vegas. However, Atlanta’s share of current CMBS loans maturing in 2017 totals only $2.65 billion, or roughly 2.5 percent of the national total. Of these pending 2017 maturities, the vast majority (88.7 percent) are current, performing loans.

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Retail properties have the most loan exposure at 40 percent of total loan volume, and industrial has the least exposure at 3.7 percent. This loan share imbalance reflects the declining credit quality of maturing loans and is also correlated to the shift occurring in commercial property markets across the United States. The rapid expansion of internet commerce has resulted in tremendous positive activity for industrial and logistics facilities, while demand for retail space in all but the strongest markets and submarkets has been moderate. Market timing and ambitious underwriting are primarily responsible for CMBS loan distress, but underperforming property sectors and markets compound the loss severity.

Despite the overhang of CMBS in markets throughout the United States, it represents a minority share (roughly 10 percent) of the CRE mortgage universe. Moreover, commercial real estate fundamentals remain exceptionally strong. U.S. office vacancies are at an eight-year low, industrial absorption has outpaced the long-term average for the past 16 quarters, and multifamily absorption is on a seven-year run of tremendous positive occupancy growth.