Morningstar: CMBS Payoff Rate Jumps

The final year of the three-year commercial mortgage-backed securities ‘maturity wave’ of loans disbursed between 2005 and 2007 started out strongly, reported Morningstar Credit Ratings LLC, Chicago.

The on-time payoff rate for maturing loans in CMBS increased to 80.3 percent in January from 73.4 percent in late 2016, Morningstar said.

But the ratings agency said it does not view the increased payoff rate as a longer-term trend. “This payoff rate increase likely reflects a temporary increase in the market’s appetite to provide take-out financing for loans secured by assets with higher loan-to-value ratios,” the company’s January Maturity report said.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, called the surprisingly high refinancing success a “monthly theme” lately. “If you go back a year or so, the analysts’ consensus was for a much lower payoff rate from 2016 maturities,” he said. “The reason given was too much debt and too little debt yield. But here’s where the prediction may continue to break down: the majority of these loans are not rolling back into CMBS.” 

Olasov noted that all CMBS servicers have maturity-default watchlists “and they have all observed low debt yields and high loan-to-values that should be prohibitive to refinancing absent a debt re-sizing. But still they’ve paid off at 80 percent-plus levels,” he said. “Where’s the payoff wire coming from? Frequently from some large community or small regional bank with a different–and more permissive–credit box.” 

Olasov said CMBS may no longer be the so-called ‘lender of last resort.’ “If banks’ demand for commercial real estate continues to grow, the ‘wave of maturities’ may be more of a swell at low tide,” he said.

Morningstar reported that 641 loans with a combined balance of $8.19 billion paid in full at maturity during January. Ten-year loans issued in 2007 dominated the maturities, registering 97 percent of the month’s maturing unpaid balance.

Morningstar predicted that the maturity payoff rate will fall going forward, calling many loans scheduled to mature in 2017 overleveraged. After including defeased loans and January maturities that paid off, Morningstar said that it expects that 2017’s final payoff rate will fall between 55 percent and 60 percent.