Only Ripples Likely From Next CMBS Maturity Wave

A new Morningstar report indicates that relative to the last big surge of maturities, between 2015 and 2017, the upcoming one will see a higher rate of on-time payoffs.
Steve Jellinek, Vice President, Morningstar. Image courtesy of Morningstar

What begins, must end, one way or another. As loan originators gradually ramped up after the Great Recession, and the packaging of commercial mortgage-backed securities grew apace, so the CMBS sector now faces a wave of maturities from 2020 through 2023 that totals more than $170 billion. According to a new Morningstar research report, the good news is that the on-time payoff rate is likely to remain in the range of 80 to 85 percent.

This would be stronger than the payoff rate than during 2015 and 2017, when $222.48 billion in CMBS hit maturity, “because of more selective underwriting standards, rising valuations, and the Fed’s dovish interest-rate outlook amid a slowing economy,” the company says. The pace of CMBS maturities rises from nearly $20 billion in 2020 to nearly $65 billion in 2023. Almost all of these are loans that were originated post-recession, Morningstar explains, so that they generally have lower leverage, on top of which the underlying properties have typically risen in value.

In 2020, the loans that are likeliest to miss their payoffs are the 8 percent with LTVs greater than 80 percent. These total about $1.59 billion in unpaid principal and might have difficulty refinancing, Morningstar suggests. 

CMBS issuance has declined notably in 2019, to $16 billion in the first quarter, versus $19 billion 12 months earlier, according to figures from the Mortgage Bankers Association. Some industry observers expect about a 10 percent drop this year, though others think that’s a bit pessimistic. Meanwhile, CMBS delinquency rates have continued to fall since the end of 2017. As of February, the rate was only 3.78 percent.

Property types differ

Because demand for distribution and flex space is running ahead of supply, even as strong absorption is pushing vacancy rates further down, industrial loans look to be headed toward the highest payoff rates.

Surprisingly, perhaps, Morningstar expects maturing loans on retail properties to have the second-highest payoff rate. This is in sharp contrast to the previous maturity wave, when over-leveraged retail loans were a major concern. This time, “lenders have shifted toward lower-leveraged, higher-quality properties and retail sales remain healthy,” wrote Morningstar Vice President Steve Jellinek.

A combination of three metrics is making office loans “a major concern,” says Morningstar. This property type faces significant exposure—about 18.4 percent—in terms of principal balance, it has a substantial percentage of LTVs over 80 percent, and it has the second-highest percentage of loans—after multifamily—with debt yields greater than 9 percent. All of these are compounded by a large influx of deliveries, which will hamper both occupancy and rent growth.