Low Rates Driving CMBS Defeasance Trend

Fitch Ratings, New York, said commercial mortgage-backed securities borrowers are taking advantage of the current low interest rate environment to defease their loans.

Although year-to-date volume is down from the prior two record-setting years, defeasance–substituting securities for collateral to pay off a CMBS mortgage early–is significantly above the long-term level.

“Any volatility in interest rates and liquidity constraints stemming from the economic impact of the coronavirus pandemic will dictate whether the trend keeps pace,” Fitch said in a special report, Continued Defeasance in U.S. CMBS Driven by Low Rates.

New defeasance volume within Fitch’s CMBS 2.0 universe equaled $9.26 billion in 678 loans through end of November. Defeasance reached a cycle high of $14.87 billion in 928 loans last year. The figure averaged $7.25 billion between 2016 and 2018.

Fitch said borrowers have defeased nearly $4 billion in CMBS conduit loans this year, 43 percent of total defeasance. The paid-off loans had a 5.02 percent average rate, significantly above the year-to-date December 2020 weighted average coupon rate of 3.64 percent.  

Borrowers defeased $4.39 billion in Freddie Mac loans through November, 47 percent of defeasance. The paid-off loans carried a 4.25 percent average coupon, exceeding the 3.33 percent year-to-date weighted-average coupon on Fitch-rated Freddie Mac transactions.

“Similar to 2019, loans secured by multifamily and office properties dominated the overall defeasance activity seen in 2020,” the report said, noting multifamily properties secured 58 percent of CMBS loans paid off early and office assets secured 16 percent. “The elevated multifamily defeasance volume can also be attributable to cash flow growth in recent years that has translated to property value appreciation.”

Defeasance volume by property type through November 30, according to Fitch:

–Multifamily: $5.40 billion in 398 loans so far this year compared with $7.36 billion in 517 loans last year.

–Office: $1.51 billion in 39 loans compared to $3.05 billion in 72 loans during 2019.

–Retail: $526 million in 60 loans compared to $1.19 billion in 97 loans last year.

–Hotel: $319 million in 20 loans; borrowers defeased $459 million in 30 loans in 2019.

–Industrial: $265 million in 27 loans compared to $523 million in 38 loans in 2019.