CMBS Payoffs Likely to Increase
The payoff rate for securitized commercial real estate mortgages should bounce back this year following two years of weak performance, saidMorningstar Credit Ratings, New York.
The maturity payoff rate for loans packaged in commercial mortgage-backed securities could reach 85 percent this year, compared to 72.3 percent in 2017, and 75.6 percent in 2016, Morningstar said.
“In 2018, we see fewer concerns around maturities,” the Morningstar CMBS Maturity report said. It noted there will be only $10.2 billion in maturing CMBS loans this year and said maturing CMBS 2.0 loans will exceed pre-crisis loans for the first time this year.
CMBS 2.0 loans generally generate less concern than pre-crisis loans because 2.0 transactions were underwritten more conservatively and with lower leverage, Morningstar said. “Further, these assets have generally benefited from rising property valuations throughout the loan term, bolstering the borrower’s equity cushion and easing refinancing concerns.”
Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, said several points come into focus as the last of the 2007-vintage pre-crisis loans goes away. “First, underwriting CMBS loans in terms of value and cash flow differ from other lending sources,” he said. “Loans which underwrite in excess of 80 percent LTV are not typically financeable into CMBS, yet many of these loans successfully refinanced with other lending sources. Second, the current world of CMBS is soon to be exclusively post-legacy.”
Olasov predicted CMBS delinquency rates will rapidly decline–until the larger real estate cycle turns down. “These better metrics may translate into more investor demand that supports a virtuous cycle of more competitive CMBS pricing,” he said. “This may allow CMBS to steal market share from other sectors.”
Despite 2017’s relatively poor performance, the payoff rate for the year exceeded expectations, Morningstar noted. “Borrowers with highly leveraged loans successfully repaid them at their maturity dates, which indicates that there is liquidity in the commercial real estate market and that lenders and investors don’t see property values declining significantly anytime soon. Low interest rates and the availability of additional subordinate debt also have contributed to the higher-than-expected payoff rate.”
Morningstar acknowledged some “pockets of risk,” but said continued economic growth should boost demand across most property sectors, boosting payoff rates. “The industrial sector may be the prime beneficiary of the stable economic activity in 2018, and the multifamily, hospitality and office sectors may start to slow after several years of gains and higher levels of new construction,” the report said. “Retail, however, could continue to have higher levels of risk, as the industry consolidates and attempts to cope with the threat of online shopping.”
Meanwhile, DebtX, Boston, reported prices of commercial real estate loans underlying CMBS increased in December. The estimated price of whole loans securing the CMBS universe increased to 97.6 percent from 96.9 percent at the end of November.
“The December rise in loan prices in the CMBS universe was due to flattening Treasuries and a tightening in base market spreads,” said DebtX Managing Director Will Mercer. “For the full year 2017, commercial real estate loan prices remained steady.”
