Deloitte: Hope for Market, but Maturities Loom
- Mar 04, 2010
March 4, 2010
By Allison Landa, News Editor
While a decent amount of indicators are looking brighter than in years or even months past, the amount of loan maturities coming up in the next several years could put a dent in that optimism.
That’s according to Deloitte, which held one of its dBriefs Real Estate Series on Thursday with regard to “Improving Liquidity in Commercial Real Estate Markets: Will Capital Markets Show You the Money in 2010?”
The answer, not surprisingly, is mixed.
According to Deloitte’s data, $552 billion in upcoming commercial mortgage loans will come due in 2010. From there the numbers rise – in 2011, $560 billion will come due. In 2012 that figure drops slightly to $537 billion. In terms of leveraged loans, $71 billion will come due this year, while $113 billion will come due the following year. In 2012, $203 billion comes due – making this category one to watch as the projected numbers keep rising.
“Because of pretend and extend, a lot of … loans got pushed out,” managing director of Deloitte financial advisory services Constantine Korologos said during the presentation. “While commercial mortgage-backed securities don’t necessarily reflect the lion’s share of the loans that are maturing, there are a lot of CMBS maturities approaching over the next five years.”
In terms of CMBS maturities, Deloitte finds that the greatest amount of upcoming maturities are loans originated in 2007 and are coming due in 2012.
“We know that over the last three years of active lending – 2005, 2006, and 2007 – that’s where a lot of the more aggressive loans and valuations occurred,” Korologos said. “Going forward, a lot of the 2007 vintage was kind of the peak of the lending market and it’s coming (due) in 2012.”
He noted that according to an audience poll, most people expect significant recovery to begin occurring between 2012 and 2015.
“(2012) is the earliest when people expect solid recovery occur,” he said. “So you do have some coming maturities that could present a problem.”
Characterizing 2007 as the year “when the music stopped”, Korologos said loan originations were significantly lower in 2009 than two years earlier. However, he said, they were significantly better in 2008, though “the bar was pretty low.”
Bob O’Brien, who leads Deloitte’s U.S. real estate practice, noted that 140 banks failed in 2009, which was the highest total since 1992.
“Many analysts are saying that before the real estate market can recover, banks need to work through their bad assets,” he said.
Korologos added that many key lenders – Bear Stearns and Washington Mutual, for example – no longer exist in their current form. “And when you look at the amount of origination and then what percentage that represented of the total CMBS issuance in 2007,” he said, “the institutions that are no longer present in their current form represented a third. This will be added stress … in 2012 and 2013.”
Deloitte director of real estate advisory services Scott Hileman echoed these predictions.
“We know that both in CMBS and as well as the commercial banks, the delinquency rates have continued to increase,” he said. “In a lot of cases it’s not the large banks that have the problem, but it’s the community and regional banks.”
Those banks, he said, hold $1 trillion worth of commercial real estate.
“They have serious problems,” he said. “The FDIC’s list of problem banks are growing exponentially … in many cases those are going to be shut down.”
As the number of distressed assets begins to pile up, Hileman says he’s seeing banks using more creative tactics such as switching interest rates and using cashflow mortgages in order to deal with what’s on the table right now.
However, the presentation was not all doom and gloom. In a section humorously referred to as “optimism and possibilities”, Korologos noted that the credit market is beginning to thaw.
“The market is starting to lend again,” he said. “And that’s a good thing because the liquidity that disappeared from the market is going to be the only thing that will facilitate transactions.”
With Freddie Mac and Fannie Mae still active lenders, they are providing liquidity for the multifamily market and, Korologos says, commercial banks are beginning to wade back in.
“The lenders are stepping into the market … and we have new lenders who are stepping into the market who are looking to actively participate and lend,” he said. “These are all good things and it’s a story that we were not able to tell the same way five or six months ago.”