- Dec 19, 2012
By Robert Bach, National Director of Market Analytics, Newmark Grubb Knight Frank
The other day I was assembling a PowerPoint presentation, shuffling graphs and trying to build a story line that made sense, when all of a sudden I had one of those “ah-ha” moments when I put two graphs side-by side. The first was a graph from Goldman Sachs displaying commercial real estate loan rollovers from all lenders – CMBS, banks, insurance companies and agency lenders (Fannie Mae and Freddie Mac). The volume of loans needing to be refinanced will peak in 2013 at more than $350 billion; over the next five years, refinancing needs will total $1.7 trillion, dropping off significantly after 2017 although loans made going forward will add to those totals. CMBS loans will not peak until 2017, however, as CMBS lenders were most aggressive in the bubble years of 2006 and 2007.
Next to that graph I placed a graph from the Mortgage Bankers Association displaying loan delinquency rates for all types of lenders. Delinquency rates for insurance companies and the agency lenders stayed low, relatively speaking, through the recession and are razor-thin today. Bank loan delinquencies peaked at 4.34 percent in the second quarter of 2010 and have been sliding since then, ending the third quarter of 2012 at 2.93 percent. CMBS lenders saw delinquencies peak at 8.97 percent in the second quarter of this year and then decline slightly to 8.86 perent in the third quarter. Moody’s, which tracks CMBS delinquencies on a monthly frequency, says that rates have declined for four consecutive months.
So just as the need for debt to refinance loan rollovers is peaking, delinquency rates are on the way down, even for CMBS, where lenders took on the most risk – my “ah-ha” moment. Yes, segments such as suburban office remain weak; yes, CMBS delinquencies are still high on an absolute basis; and yes, the economy is on shaky ground with businesses, consumers and investors awaiting the outcome of the fiscal cliff negotiations. But in the absence of a cliff-induced recession next year – a low probability – look for commercial real estate to continue performing for its investors, and expect yield-hungry investors to venture further out on the risk curve – secondary markets and Class B assets primed for repositioning. The Federal Reserve’s intention to ramp up its quantitative easing program by purchasing $45 billion of long-term Treasury securities per month in lieu of “Operation Twist” will bolster investors’ appetite for yield across all asset classes including commercial real estate.